Rising home loan interest rates are pushing real estate developers to withdraw subsidy programs

Rising Home Loan Interest Rates Push Home Developers to Pull Subsidy Programs |

Repeated increases in home loan interest rates have led developers and financial institutions to quietly withdraw subsidy programs from the housing market for homebuyers. In the past six months, these programs, which had become one of the popular marketing strategies of property developers, have mostly been retired.

A grant program is a three-party agreement between a buyer, the developer and the institution that provides the home loan. The terms of the deal give the buyer a break from paying interest on the loan for a set period of time. Before the sanctioned loan is released, however, the buyer must pay a deposit to the developer.

Various combinations have been offered by banks and developers, such as 25-75 (meaning the buyer must pay 25% upfront and the balance on possession), 20-80, 10-20-10 -60 and 5-90- 5.

Such programs have benefited those who were looking to buy homes but did not want to pay EMI until they had taken possession of their homes. Until that time, the developer manages the home loan account.

But as the American proverb goes, there is no free lunch, and the resulting increase in apartment value is passed on to the end consumer. If the price of an apartment opted for the construction-related payment plan is compared to that of a similar apartment under the subsidy scheme, the total amount paid under the latter plan is much higher, because the buyer must eventually repay the interest paid by the builder to the bank.

Until earlier this year, developers advertised their plans with such schemes on billboards in the Mumbai metropolitan area. “With rising interest rates, however, we cannot provide homebuyer subsidy schemes,” admitted Sandeep Runwal, managing director of Runwal Group.

In its latest monetary policy announcement on September 30, the Reserve Bank of India (RBI) did not indicate whether this would be the last hike in the repo rate. According to experts, we can expect a few more rounds of interest rate hikes.

Since May this year, the RBI has raised the repo rate (the rate at which it lends to banks) by 1.90% in four monetary policy meetings and announcements. As a result, banking and financial institutions as well as promoters do not have a sufficient margin of safety to propose subsidy programs.

“Only a handful of developers continue to offer grant programs,” said Pankaj Kapoor, founder and chief executive of Liases Foras, a no-brokerage real estate search firm. “Some absorb the impact of rising interest rates while others design the system so that the buyer’s down payment is higher than before. This helps them reduce the risk of higher interest rates and sweetens the deal for the client as there is not much difference in the price of the apartment when comparing between the subsidy program and a regular non-subsidy offer.

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Leslie M. Gill