Government plans to give an interest subsidy for urban poor

In India in the metro cities New Delhi and Mumbai the real estate prices have doubled in last two years and this has made difficult for the less affluent to have their own homes. In December the government had said that India can face a shortage of 26.5 million houses by 2012.

Junior Finance Minister Pawan Kumar Bansal said in a written reply in parliament in New Delhi that India is planning to give an interest- rate subsidy on mortgages for the poor in the nation’s cities as property prices soar. “A proposal to provide interest subsidy on housing loans for the economically weaker sections and the low-income group in urban areas is under consideration of the government of India”. He said the details of the plan are being “worked out”.

The government has been pushing banks to lower lending rates to encourage spending and keep growth from slowing. Even the Finance Minister Palaniappan Chidambaram earlier this month had suggested that banks can cut rates on home loans up to 2 million rupees ($50,000). Following the persuasion from the finance minister State Bank of India, the nation's biggest bank, and a few other state-run lenders last month lowered the rates they charge top-rated borrowers. The Mumbai-based State Bank of India had cut its rate to 12.25 percent in two phases last month.

The government also has plans to forgive 600 billion rupees of loans owed to banks by small and marginal farmers. Though all this a election stunt as the Congress party-led United Progressive Alliance government has to face elections before the tenure of the lower house ends in June next year.

Want to take home loan – Fixed or Floating?

Earlier the public sector banks had slashed rates then last week Punjab National Bank slashed its loan rates. Then the US Fed had also slashed rates. Currently we are on the higher side of the interest rate cycle in India and the interest rate differential between US and Indian rates has widened as RBI kept its rates steady in the last credit policy. It is expected that RBI might announce a cut in rates in the next credit policy in order to narrow the interest rate differential.

Establishing the weakness of the global economy, in the short term interest rates are likely to move down rather than up. Therefore new home loan borrowers should go in for flexible rates in order to take advantage of the likely downward movement in rates.

While floating rate loans are 1.5-2 per cent cheaper than fixed rate loans (of comparable tenure). Then why to pay Rs 100-150 more per lakh of loan, and fix yourself for your entire tenure (10-20 years) at today’s high rates?

In case the interest rates are at the bottom of the interest rate cycle then only it is advisable to take home loan at fixed rates. When the floating rate is around 7-7.25 per cent, then it is the right decision to take a fixed rate loan at 8.75 per cent, then you will be the winner. Though, it is difficult to predict the bottom of the interest rate cycle. However, if you look at the last interest rate cycle and compare current rates, your call should be good enough. But the rule to follow: take a floating rate loan when rates are on the higher side and a fixed rate loan when rates are near the bottom.