Union Budget 2022: Home loan buyers seeking increased deduction cap

Currently, one third of India’s population resides in cities and it is estimated to reach 50% by 2030. There is a steady increase in the number of households with a transition to nuclear families and increased urbanization.

The 66% of the young population – under the age of 35, are becoming millennial young mortgage borrowers. It is also true that the home loan market is driven by young borrowers in the 26-35 age bracket – around 25% and also by people in the 36-45 age bracket – around 28 %. They are all active home loan audiences and together represent 53% of annual arrangements.

The average home loan ticket size of young borrowers has steadily increased over the past 5 years, with a CAGR of 6.2%. The ticket size continues to increase more for women than for men. The cumulative active home loan base of these borrowers has grown steadily over the past 3 years at a CAGR of 3.5%.

These young borrowers were at the origin of a change in the mortgage market.

Within the affordable segment, the growth in the volume of home loans from Rs 15 to 35 lakh, over the last 4 to 5 years, indicates a shift in buyer preferences towards higher note sizes. The demand for rural accommodation for mid-size and larger tickets has also continued to increase over the past 5 years. The share of annual creations (volume) of note size Rs 35-75 lakh has increased by 4% in the last 5 years. The share of annual departures of Rs 75 lakh plus ticket size has increased from 0.37% to 0.87% over the past 5 years.

The share of annual issuances of Rs 15 lakh note size has been declining over the past 5 years, largely due to declining demand for the very small segment of Rs 2 lakh note size.

Scarcity of disposable income has been a disincentive for the working class to take out a home loan and buy property. Since the cost of inputs in real estate has increased the rates, the working class has no choice but to seek real estate loans from financial institutions. Interestingly, the repayment term of the home loan fluctuates between 11 and 30 years.

There is also a disincentive for the salaried class in home loans and EMIs. EMIs are no longer favorable since financial institutions attract more of the interest in EMIs first and the principal component is less retained in more than the top 50 percent of EMIs. As EMIs are nearly completed, the interest component becomes negligible and the principal component is much higher.

Even though the buyer has the option of prepaying the home loan, they end up paying most of the principal amount rather than saving on interest. In addition, financial institutions also charge hefty fees on the pre-closing of loans. In the event that the buyer opts for a longer occupancy period for the repayment of the loan, then it is difficult for the buyer to invest in a second property.

A question that has been frequently asked is – “If the amount of principal and interest is predefined, why can’t EMIs have an equal amount throughout the tenure.”

As for the tax benefit, repayment of the principal amount of a home loan qualifies for a deduction under Section 80C, which has an upper limit of Rs 1.50 lakh per annum. Since the same section – 80C, represents a number of other investments including PF, PPF and life insurance policies etc., it becomes impossible for a buyer to enjoy any benefit of this section .

Buyers are eagerly waiting for this limit to be increased in the Union-2022 budget, as this limit has not been increased in recent years.

Regarding the tax benefit for interest payment, as under Section 20(b) of the Income Tax Act, there is a cap of Rs 2 lakh per annum on the interest portion of the home loan, home loans being larger, the home buyers also cannot enjoy the same. To extend the tax benefit to buyers, the government has also added some subsections 80EE, 80EEA under the income tax law, but the volume of loans does not allow buyers to get the additional benefits. desired from these subsections.

What may be needed in the 2022 Union Budget is to make dynamic changes to income tax brackets and increase refunds under Sections 80C, 80EE, 80EEA and 24 (b) income tax law.

One of the greatest philanthropists Andrew Carnegie said – “90% of all millionaires become so by owning real estate.” Andrew Carnegie is one of the five people who built America, the other four being Cornelius Vanderbilt, John D. Rockefeller, JP Morgan and Henry Ford. Harv Eker, an author and businessman, known for his theories on wealth and motivation, said – “Don’t wait to buy ‘real estate,’ buy real estate and wait.” These two statements told everything about owning real estate and what it could mean to a buyer.

Globally, investing in real estate is directly linked to a buyer’s future and also to the growth of the economy, and the same is true in India.

(Pankaj Bansal is Director – M3M India Pvt Limited)