What Is A Home Loan And How Does It Work?
- The biggest loan that an individual makes in their life is to get the dream home built.
- Housing is one of the three essentials required for an average individual, society, or economy.
- To satisfy this demand, housing finance is increasingly growing around the country.
- When we consider the scenario of 40 years ago, people knew that the only road to get their house built is by saving money.
- Many retired people relied on their provident funds and gratuity amount for buying a house. Home loans weren’t even an option on the table.
- Many factors played a deciding role at that time like their financial dependence, age of buying a house, and social structure.
- As the age and gender roles started reversing by the end of the 20th century, the young generation and women have begun thinking about investing in a house.
- Paying equal EMIs wasn’t even a burden because of their well-paying jobs.
- The stigma attached to the borrowing of funds in older India slowly started losing its roots in this new India.
- The main factors that attracted the buyers to the home loan are declined prices of property, easy affordability of housing, attractive tax incentives, and decreased interest rates.
- Housing finance has become one of the major businesses in India.
- Whether it is for a builder or buyer, banks have come with many lucrative offers to motivate the buying and constructing residential spaces.
- In this article, we will be stressing the evolution of the home loan system over the years to give you a brief idea of the bank involved in the home financing system.
Types of Indian Housing Market
- The structure of housing finance in India is vast to satisfy the population demands.
- Mentioned below are the types of markets available for housing in India, along with their target buyers.
- Public sector housing caters to the housing demands of the poor.
- Along with this, they provide housing for the employees of the State.
- The middle class and low-class groups buy houses from the legal private housing sector.
- The unregulated sector largely consists of the slums and little distributed settlements in which more than 30 million people in India live.
- This was just a very broad classification of the vast housing market.
- Depending on the type and location, this market can be further classified as Formal and Informal, and Urban and Rural.
- The problems in different housing markets are mentioned below.
Urban Housing Market
- The complication in this market is attaining access to finance and land, along with the availability of material for construction.
Rural Housing Market
- The major problem in rural markets is the availability of resources, income priorities, income distribution, and similar problems.
- The presence of thousands of such markets for housing makes it difficult for even the most advanced country to maintain an equilibrium in the extremes of the housing market.
- In addition to the broad categories mentioned above, there are many sub-markets for labor, land, and infrastructure.
- The price of a housing unit is mostly decided based on these factors.
Growth of Indian Home Loan Industry
The Introduction Of Home Loan in India
- The first attempt at establishing a national system for regulating home loans was made in 1988 with the introduction of the National Housing Policy (NHP).
- For this purpose, the National Housing Bank (NHB) was set up as an apex institution for providing home loans across the country.
- It was an entirely-owned subsidiary of the Reserve Bank of India (RBI).
- With the main objective of establishing and promoting housing financial institutions in India, this bank was established.
- It also did the task of providing facilities of refinancing to scheduled commercial banks or housing finance corporations.
- Earlier than the NHP, HDFC began operating as a housing finance bank when the concept was entirely new in 1977.
- At that time, the concept of housing loans was seen to be unproductive, which is why HDFC enjoyed a monopoly in the sector for a long time.
- Some years later, from 1979 to 1984, many task forces were set up for reviewing the housing development strategies.
- After amending the Insurance Act of India in 1988, the General Insurance Corporation (GIC) and Life Insurance Corporation (LIC) entered the sector of housing finance in the country.
- This was the same time when the NHB was set up for the same purpose.
- In 1989, commercial banks were allowed by the RBI to provide large housing loans without a loan quantity ceiling or the limitation of an interest rate.
- In the same year, UTI facilitated a mechanism for direct investment in real estate development and construction projects.
- This was done using a housing and construction investment fund.
- In the following years, many banks started providing and promoting housing loans across India.
- Many financial institutions specialising in home loans also emerged in the late 1980s or early 1990s.
- Under the directions of the NHB, many Housing Finance Companies (HFCs) were set up to satisfy the increasing demands for housing loans.
- The government of India started recognising the need for financing for this sector, and they started devising methods to improve the potential and spending limits of the commercial banks.
- For this purpose, they enhanced the amount that was set aside by the Indian commercial banks.
- As the home loans were provided to the borrowers using this money, we saw a spike in the amount kept aside for this purpose.
- In the Union budget of 1999-2000, about 1.5 percent to 3% amount was made use of, for lending.
If we explain the phases of the home loan industry in India, it can be listed as follows:
- Phase 1: The government dominated in this phase which was considered in the period before 1970.
- Phase 2: From 1970 to 1980, HDFC and HUDCO were established to meet the needs of home loans in India.
- Phase 3: NHB came into existence along with GIC and LIC from the period between 1980 and 1990.
- Phase 4: Interest rates were liberalised in the period between 1990 and 2000. It was during this phase when we saw the establishment of special financial institutions for providing home loans.
- Phase 5: From 2000 to the current date, the home financing sector has seen a high growth rate.
- Over the years, the tax rebates on home loans have reduced, making it an attractive investment option for upper and middle-class groups.
- After 2000, the growth rate of this sector skyrocketed due to the increase in the purchasing capacity of the customers and attractive interest rates.
- During the first few years of this phase, home loans were disbursed at a high rate.
- The prices of properties stabilised and the government provided financial incentives to make this sector appealing for the private businessmen in the country.
- In 2005, the number of disbursed home loans reached 7,68,191.90 million from the earlier 1,47,012 million in 2001.
- In between, the year 2003 saw a 76% annual growth rate in loan disbursement across the US.
- The factors playing an important role in determining the current scenario of home loans in India are the bank interest rates, tax rebates, and the impact of the measures taken by the banks to encourage home loans.
- The Government of India has also taken substantial steps, such as the Pradhan Mantri Awas Yojana which was launched in 2015, to realise the housing dream of millions of Indians, a reality by 2022.
- The sector of housing financing faces many problems because of the fiscal policy decisions and macroeconomic conditions of the country.
- Factors like management of taxes like service tax, VAT, stamp duty, and excise, also pose a challenge to the industry.
- As the country moves forward to make ‘Housing affordable for all’ by 2022, there could be many other incentives provided by the government to the banks and borrowers in the coming years.