National Housing Bank (NHB) launched a new dedicated low income housing refinance scheme on 9th July 2012. Now, NHB has reduced the refinance interest rates of this scheme by 75 to 100 basis points.

NHB will also provide long term fixed rate refinance at affordable rates of interest for construction /purchase of houses in urban areas to people in the lower income segments, including those engaged in the informal sector.

NHB reinforces the need for creating a long term fixed interest rate market for housing, particularly for the low and moderate income households in general, and especially those who may not be able to absorb the volatilities in the interest rates under the floating regime.

Accordingly, under the Scheme, NHB shall provide refinance assistance to Primary Lending Institutions (which include banks, Housing Finance Institutions and other lending institutions in cooperative sector) at lower rates of interest for long term in respect of their housing loans upto Rs. 5 lakhs extended to the target segments viz, households having monthly income not exceeding Rs. 15,000, to be determined as per the PLIs' appraisal and assessment and not through formal income certification.

NHB will refinance for tenures ranging between 5 and 15 years at fixed rates. Interest rates on NHB's refinance would be 9.00% per annum for loans upto Rs. 2 lakhs (slashed down from the present 10%) and 9.25% per annum for loans between Rs. 2 to Rs. 5 lakhs (slashed down from the present 10%).

NHB has also indicated that prepayment under the Scheme is permissible without attracting any prepayment levy. NHB expects Primary Lending Institutions to pass on the benefit of reduced refinance rates to the ultimate borrowers by extending housing loans for longer tenure at lower fixed rates, thus enhancing affordability.

This scheme of NHB will also have immense synergies with its recently constituted Mortgage Credit Guarantee Fund Trust. This trust gurantees individual retail loans upto Rs. 5 lakhs. So, the Banks and HFCs extending loans under the NHB's special refinance scheme and also covered by the credit guarantee, under Government of India supported Mortgage Credit Guarantee Fund Trust, will have significant credit risk mitigation, better asset-liability matching, and lower refinance rates. The combined effect of all these features will result in substantial rate reduction for the ultimate borrowers, enhancing affordability.

However, the ticket size of home loans, especially in urban areas, is significantly higher. So, the benefit of cut in refinance rates under the above scheme will be negligible from the overall housing finance market is concerned. On a relative basis, banks will benefit more than Housing Finance Companies.