Affordable housing finance in India is changing fast. The borrowers it serves \u2014 first-time buyers, self-employed households, Tier 2 and Tier 3 city residents \u2014 remain the same. However, the way credit reaches them is being rebuilt from the ground up.<\/p>\n\n\n\n
Ticket sizes are moving up within the affordable band. The government has redesigned its subsidy programme. Rate cuts are making home loans genuinely cheaper. Most importantly, smaller cities are now driving the bulk of India’s home loan growth \u2014 a shift that mainstream financial coverage has barely caught up with.<\/p>\n\n\n\n
This article draws on data from CRISIL Intelligence, Knight Frank, EY, and current market reports to map the five trends reshaping the sector through 2026.<\/p>\n\n\n\n
Between FY21 and H1 FY26, the share of sub-\u20b91.5 million loans in affordable housing outstanding fell from 36.69% to 30.40% by value. Meanwhile, the \u20b91.5\u20133.5 million bracket grew its share from 63.31% to 69.60%, according to CRIF HighMark data analysed by CRISIL Intelligence.<\/p>\n\n\n\n
This is not demand falling away. It is demand moving upward within the same affordable band.<\/p>\n\n\n\n
Rising input costs drove this shift. Steel, cement, and labour all became more expensive between FY23 and FY25. As a result, developers raised prices on new housing \u2014 even on entry-level units in smaller cities. Borrowers therefore needed slightly larger loans to finance the same type of home.<\/p>\n\n\n\n
Besides that, many borrowers who once qualified for sub-\u20b91.5 million loans have seen their incomes grow. They now target slightly bigger homes \u2014 still within the \u20b93.5 million affordable ceiling, but at higher ticket sizes.<\/p>\n\n\n\n
The borrower profile has not changed. These are still first-time buyers and self-employed households. What has changed is the cost of the property they are financing.<\/p>\n\n\n\n
CRISIL projects the \u20b91.5\u20133.5 million segment to grow at a CAGR of 10\u201312% between FY25 and FY28<\/strong>. That outpaces the overall affordable housing market growth rate of 8\u201310%. For lenders, this shift signals better borrower income stability and stronger repayment capacity.<\/p>\n\n\n\n This is the most important geographic shift in Indian housing finance in a decade. According to the Urban Money Homebuyers Credit Pulse Report (YTD 2025), Tier 2 and Tier 3 cities now account for 64% of total home loan volumes in India<\/a> \u2014 up from 60% in 2024.<\/p>\n\n\n\n Most importantly, these markets grew home loan volumes by 81% year-on-year in 2025<\/strong>. Tier 1 cities, by comparison, grew at 52%. The gap is wide and structural.<\/p>\n\n\n\n Cities like Chandigarh, Jaipur, Surat, Madurai, and Palwal recorded some of the sharpest increases in loan creation during 2025. In each case, real demand drives this growth \u2014 not speculation. First-time buyers and mid-income households are entering the market, many of them choosing to stay in their home cities rather than migrate to metros.<\/p>\n\n\n\n CRISIL data adds further weight. The share of HFC disbursements in Tier 3 cities and beyond reached 50.29% in H1 FY26<\/strong>, up sharply from 33.10% in FY21. That is a near-doubling in five years.<\/p>\n\n\n\n Three forces work together here. First, road and rail infrastructure now connects smaller cities more efficiently to economic hubs. Second, GCCs and manufacturing units are expanding beyond metros, creating local employment. Third, housing finance companies have built deeper branch and digital networks in geographies that large banks have historically ignored.<\/p>\n\n\n\n A BusinessToday report from February 2026<\/a> found that nearly 72% of borrowers under 40 now prefer applying for home loans online. Crucially, this preference extends to semi-urban and rural borrowers \u2014 not just metro users.<\/p>\n\n\n\n Buyers exploring options in specific cities can check which locations have active lender coverage<\/a> before starting their application.<\/p>\n\n\n\n The RBI’s Monetary Policy Committee reduced the repo rate by a cumulative 125 basis points through calendar year 2025<\/strong>, bringing it down to 5.25% by December. This is the most significant easing cycle since the post-COVID period.<\/p>\n\n\n\n For floating-rate home loans \u2014 which make up the vast majority of home loan products in India \u2014 this directly reduces monthly EMIs. According to Aditya Birla Capital, home loan rates in early 2026 range from 7.10% for top-rated salaried borrowers to around 12.58% at the upper end. Self-employed borrowers typically start from around 8.00%.<\/p>\n\n\n\n The numbers matter at the household level. On a \u20b920 lakh loan over 20 years, a rate fall from 9.50% to 8.25% cuts the monthly EMI by around \u20b91,600. For a household earning \u20b940,000 per month, that difference determines whether they qualify for a loan at all.<\/p>\n\n\n\n Therefore, rate cuts do not just lower costs for existing borrowers. They expand the pool of people who can qualify in the first place. Borrowers who were just below the eligibility threshold now comfortably meet underwriting criteria.<\/p>\n\n\n\n CRISIL identifies rate easing as one of the key demand drivers for the \u20b91.5\u20133.5 million segment through FY28 \u2014 working alongside income growth among lower-income households.<\/p>\n\n\n\n Buyers planning their first purchase can use an EMI calculator<\/a> to translate a loan amount into a clear monthly repayment figure before approaching a lender.<\/p>\n\n\n\n The Pradhan Mantri Awas Yojana entered its second phase in September 2024. PMAY 2.0 targets 30 million new homes \u2014 10 million urban and 20 million rural \u2014 by fiscal 2029. But the redesign goes well beyond the numbers.<\/p>\n\n\n\n The biggest change is how the interest subsidy works. Under PMAY 1.0, eligible EWS and LIG borrowers received a 6.5% credit-linked subsidy as a lump sum, credited to the loan account at disbursement. That front-loading created fiscal pressure. It also allowed borrowers to transfer their loan to another lender after receiving the subsidy.<\/p>\n\n\n\n PMAY 2.0 replaces this with a structured Interest Subsidy Scheme. The government now offers a 4% annual interest subsidy across all income groups<\/strong> \u2014 EWS, LIG, and MIG \u2014 paid in five equal annual instalments of \u20b936,000 each<\/strong>, totalling up to \u20b91.80 lakh. Crucially, the subsidy continues only if the loan stays active and in good standing. This creates a direct repayment incentive for borrowers.<\/p>\n\n\n\n Besides that, the phased disbursement smooths the government’s fiscal outflow over five years instead of front-loading it.<\/p>\n\n\n\n As of December 2025, 9.63 million urban homes had been completed<\/a> and 12.22 million sanctioned under the cumulative PMAY programme. The government released \u20b91,757 billion in central assistance. On the rural side, 25.27 million homes are complete against a target of 40.77 million.<\/p>\n\n\n\n The Union Budget 2026\u201327 allocated \u20b985,522 crore to the Ministry of Housing and Urban Affairs. Most importantly, PMAY-U 2.0 received a 182% budget increase over FY26 revised estimates. The Knight Frank India Affordable Housing 2025 report<\/a> notes that this increase directly targets the supply gap created by developers shifting toward premium segments \u2014 a gap PMAY 2.0’s AHP vertical addresses by offering \u20b92.5 lakh per EWS unit to developers building in partnership with state governments.<\/p>\n\n\n\n Most affordable housing borrowers are self-employed. Think kirana store owners, small contractors, tailors, and drivers. Their income is real and often stable. However, it does not show up in salary slips, Form 16s, or consistent ITR filings.<\/p>\n\n\n\n Because of this, banks have historically turned them away. Specialised housing finance companies have served them through physical field visits and surrogate assessments. What technology is now doing is scaling that process \u2014 making it faster and cheaper.<\/p>\n\n\n\n Account Aggregator (AA) Framework:<\/strong> This system lets borrowers share their financial data \u2014 bank statements, holdings, insurance \u2014 directly with lenders, with consent. For informal-income borrowers who maintain active bank accounts, this gives lenders a live cash flow picture. It replaces the need for formal income documents.<\/p>\n\n\n\n OCEN (Open Credit Enablement Network):<\/strong> This protocol connects lenders and digital platforms through shared technical standards. As the CRISIL Intelligence February 2026 report describes it, OCEN creates a “digital highway” for loans \u2014 cutting turnaround time from weeks to days for qualifying borrowers.<\/p>\n\n\n\n AI-Powered Underwriting and Automated Valuation Models (AVMs):<\/strong> Lenders now deploy machine learning models that combine bureau data with property-level data to produce risk scores. For property valuation \u2014 historically a bottleneck in smaller cities \u2014 AVMs enable remote assessment. As a result, costs fall and approval speeds rise.<\/p>\n\n\n\n CRISIL data shows HFCs held a new-to-credit (NTC) customer share of 10.51%<\/strong> as of September 2025. Banks managed just 5.69%. That gap shows housing finance companies are reaching borrowers who have never held a formal loan before \u2014 and technology is a key reason why.<\/p>\n\n\n\n The EY report New Horizons for Affordable Housing<\/em><\/a> concludes that lenders using alternative data, AI analytics, and API-led distribution will be best placed to capture the next wave of first-time buyers across India’s emerging cities.<\/p>\n\n\n\n When property records in Tier 2 and Tier 3 cities become fully digitised, home lending will standardise dramatically. That transition is already underway \u2014 state by state, district by district. Most importantly, its completion will mark the single biggest structural change in India’s housing finance market in a generation.<\/p>\n\n\n\n These five trends are not separate. They reinforce each other.<\/p>\n\n\n\n Ticket sizes move up because incomes grow. Smaller cities absorb demand because metros price out buyers. Rate cuts bring more borrowers into eligibility. PMAY 2.0 adds a repayment incentive on top of the subsidy. Technology makes it possible to serve all of the above at scale.<\/p>\n\n\n\n Therefore, the direction of affordable housing finance in India is clear. The market is becoming broader, more efficient, and better equipped to serve borrowers it has never formally reached before. For anyone tracking where India’s housing credit growth will come from over the next five years \u2014 the answer lies in its next 200 cities, not its top eight.<\/p>\n\n\n\n Sources & Further Reading:<\/strong><\/p>\n\n\n\n <\/p>\n\n\n\n Disclaimer: The information shared in this article \u2014 including interest rates, EMI calculations, subsidy amounts, property prices, eligibility criteria, and market trends \u2014 is meant for general information only. The data is based on publicly available sources, working knowledge, and industry trends available at the time of publication. All figures, examples, and estimates are indicative in nature and should not be treated as official commitments, guarantees, or offers from Home First Finance.<\/p>\n","protected":false},"featured_media":0,"template":"","article_category":[95],"yoast_head":"\n
\n\n\n\nThe Shift to Tier 2 and Tier 3 Cities: Where Home Loans Are Actually Being Disbursed<\/h3>\n\n\n\n
Smaller Cities Now Lead India’s Home Loan Market<\/h4>\n\n\n\n
Which Cities Are Leading<\/h4>\n\n\n\n
Three Factors Making This Possible<\/h4>\n\n\n\n
\n\n\n\nRepo Rate Cuts: What Lower EMIs Actually Mean for First-Time Buyers<\/h3>\n\n\n\n
The RBI Cut Rates Significantly in 2025<\/h4>\n\n\n\n
The Real Impact on Borrowers<\/h4>\n\n\n\n
\n\n\n\nPMAY 2.0 in Action: How the Redesigned Scheme Targets Affordable Buyers<\/h3>\n\n\n\n
A New Phase With a Different Architecture<\/h4>\n\n\n\n
How PMAY 2.0 Fixes the Old Problems<\/h4>\n\n\n\n
Progress So Far<\/h4>\n\n\n\n
\n\n\n\nTechnology Is Rewriting Affordable Lending: Digital Tools Reaching Informal-Income Borrowers<\/h3>\n\n\n\n
The Core Problem Technology Is Solving<\/h4>\n\n\n\n
Three Digital Layers Enabling This<\/h4>\n\n\n\n
The Evidence This Is Working<\/h4>\n\n\n\n
Where This Leads<\/h4>\n\n\n\n
\n\n\n\nThe Bigger Picture<\/h3>\n\n\n\n
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