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Interest rate subsidies on home loans. Who will benefit from that?

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Alright, if you are complaining about farmers getting all the subsidies and middle-class not getting any, then this is for you. Our beloved Government has decided to shave 1% off the interest from 9% to 8% on home loans up to 10 lakhs for a house costing 20 lakhs for one year. 1000 crores were allotted for this.

The cost of the house should be less than 20 lakhs (Or 19.99 lakhs – the Bata rate). If you take a loan of 9.99 lakhs for buying a house then you will get a interest rate subsidy of 1%. The government pays the bank for the balance 1%.  Where does the government get that money to pay the banks? My guess is -  from us. We pay taxes don’t we.

So, let me get this straight. We earn money, we pay taxes, we buy a home, government gives you give a tax break of up to 150000 for the home loan and on top that you get 1% subsidy on the home loans which again is coming from our tax money. I could not get this straight but my head is spinning.

Can someone please resolve this paradox? Paul Krugman or Thomas Freidman or whoever it takes – just explain it to us.

If we move beyond that spiel or vicious cycle, as a home buyer you still have to pay the balance 10 lakhs from your savings if you want the subsidy. How many people has 10 lakhs in their savings account. Let me tell you that I am not one of them.

Now, let me ask you this who does this really benefit? Does it benefit the home buyers or the real estate folks. From whatever we have seen so far it does not benefit the home buyer. It benefits the real estate folks. Reason is simple. Whenever there is an announcement of this kind they will be the first to know. So the will jack the price up and the overall effect is nullified for the home buyer.

But, for the real estate folks it is an extra profit. There was a bubble for a brief period when everyone felt that real estate was worst hit. On the contrary they were the least hit. Sure, I have seen Buy 1 flat and get the second flat free ads in Bangalore. But it wasn’t that worse. No body was getting the houses for cheap. Everything else remained the same.

In fact, they were sitting on large pile of inventory and never brought the price down. The occupancy rate of really big projects is really very low. But did that change the behavior and did it drive the prices down? May be it did on a small scale but on a large scale the prices are still the same. If the price has come down that was the premium which came down, not the profit.

Coming back to the home buyers, even if it did benefit them is that the kind of behavior we want? Giving subsidies for each and everything and paying taxes for almost anything.

I was watching a movie in which the protagonist said something which is very striking.

Government provides subsidies for each and everyone. It tries to ‘help’ almost all the citizens of the country. Except one particular class. That is children. So true.

And you know why children are neglected?

  1. Kaustav says

    Effectively a subsidy of Rs Ten thousand. It will lost in hiked prices. Will you ever buy a product if someone lowers the price by 1% and charges you interest at market rate after the first year.

  2. Sage says

    It is based on simple funda of stimulating demand in the economy.

  3. sapience says

    In my opinion it is good that 1% subside is given on home loan because now a days cost of house really increases so at least a person will take loan of 10 lakhs .
    ——————————————————————————————–
    Alexander Cruz
    sapience

  4. Chanda | BizDharma.com says

    True that the remaining amount will be paid from our pockets and true that this subsidy comes from the money we pay as tax. But at least we are getting 1% of the worth back :)

    The issue that I find with this kind of subsidy is that its unnecessarily complicated. Buy for 20 L and take loan of 10 and then we give subsidy. This reduces the selected few to a very specific target grop and doesn’t benefit all.

    And in case if you are not having those 10 lacs, Hi ! I work in a bank and we have selected you as a premium customer to offer a loan of ….. LoL Just Kiddin.

    1. Sriram Vadlamani says

      It is complicated for no real reason. The net effect might be the same. At the end of the day it is transfer of wealth.

  5. Ram says

    Because they do not vote!!

    1. Sriram Vadlamani says

      True. Kids can’t vote.

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