Housing Finance Methods in India

8/3/2019 Housing Finance Methods in India

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Housing finance types.

i. Home Purchase Loans

ii. Home Construction

Loans

iii. Home Extension Loans

iv. Home Conversion

Loans

v. Land Purchase Loans.

vi. Stamp Duty Loans

vii. Bridge Loans

viii.Balance Transfer Loans

ix. Re-finance Loans

x. Loans to NRIs


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i. Home Purchase Loans:Home Purchase Loans are the basic home loan

you can opt for purchasing new home. This type ofHome Loan is offered by all kinds of Banks and HFCs.

ii. Home Construction Loans:Home Construction Loans are especially

meant for the construction of a new home. Formality of

availing this loan has a little different from the normalHousing Loan. The plot on which the construction is beingerected is purchased within a period of one year, the costof the plot is then also included as the component for thevaluation of total cost of the property.

iii. Home Extension Loans:Home Extension Loans is offered for

meeting the operating cost of alteration to an existingbuilding. Extension here means addition of an extra roometc.


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iv. Home Conversion Loans:Home Conversion Loans are

offered to those who want finance for the purchaseof another home by converting the already existinghome and on which loan is already sanctioned.Through this loan, the existing loan is transferred tothe new home including the extra amount requiredand there is no need for pre-payment of the

previous loan.

v. Land Purchase Loans:Land Purchase Loans can be

availed for purchasing land for both homeconstruction as well as investment purposes.

vi. Stamp Duty Loans:Stamp Duty Loans is offered for

the payment of stamp duty in the transaction of theproperty.


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vii. Bridge Loans:Bridge Loans are offered for selling the

existing home and purchasing of another. The bridge loan

assists in the finance of new home, until a buyer is foundfor the old home.

viii. Balance-Transfer Loans:Balance Transfer of the loan is the

transfer of the balance of an existing home loan at ahigher rate of interest (ROI) to either the same companyor another.

ix. Re-finance Loans:Refinance loans are availed when a

loan from an organization at a particular ROI is droppingleading to a loss. Then the option of swap of the loan canbe availed. One can avail this from either the same HFI orother at the current rates of interest.

x. NRI Home Loans:

NRI Home Loans are meant for Non-Resident Indians who wish to build or buy a home or


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HOUSING FIGURES IN INDIA


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Housing Market

Short Supply of residentialdwellings, existing since postindependence

In 2005 estimated demand is209.5 million, supply is 189.7Million

Demand Supply gap isnarrowing

As per 11th 5 year plan

- Shortage of 24.71 milliondwellings

- Close to 99 % of shortagein EWS & LIG segment

Category Housing shortage (Mn)

EWS 21.78

LIG 2.89

MIG + HIG 0.04

Total 24.71

(Bill Longbrake Anthony T. Cluff Senior Policy Advisor Financial ServicesRoundtable February 2008)


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Housing Finance

The value of total residential mortgage debt moved up fromUSD 1.84 billion in 1994 to USD 12.26 billion in 2004, as in2007 there were 7.1 million subprime loans ,constituting 13.3%of total loans serviced.

Interest rates on housing loans have fallen from a peak of 17%

in 1996 to 7.5% last fiscal making owning a home moreaffordable.

Traditionally housing finance was dominated by a handful ofprivate sector institutions.

Salaried borrowers constitute the bulk of the clientele for thefinancier in comparison to the self-employed borrowers

Traditionally housing finance was dominated by a handful ofprivate sector institutions. These Housing Finance Companies(HFCs) commanded 70% market share in FY99, which hassubsequently fallen to 50% in FY04.

Banks now control 40% of this market


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Government Policy & Objectives

In the Tenth-Five-Year-Plan; a CAGR of 45%.Prior to that, the Government of India wasgenerally not supportive of housing finance

through its policies. Larger allocation of public funds, fiscal incentivesand tax rebates on principal repayment andEquated monthly instalments (EMIs) .

A welcome move recently announced by thegovernment is that 100% Foreign Direct

Investment (FDI) in India would be allowed intownships, housing, built-up infrastructure andconstruction-development projects.

A lot remains to be achieved with regard to issuessurrounding regularization of land records, urbanland ceiling act, rent control act etc.,


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Summary Data for India FY94-FY04

(Central Statistical Organization- Government of India, Annual Economic Surveys tabled in the Indian

Parliament.)

94 95 96 97 98 99 00 01 02 03 04

1 Real GDP Growth % 5.9 7.25 7.34 7.84 4.79 6.51 6.06 4.37 5.78 3.99 8.51

2 Residentialmortgage debt

outstandingUSD (bn) 1.84 2.1 2.13 2.24 2.59 2.94 4.28 5.56 6.88 8.89 12.26

3Residential debt / GDP

Ratio % 0.58 0.61 0.58 0.56 0.62 0.67 0.91 1.19 1.45 1.74 2.21

4 Residential mortgagedebt

per householdUSD 11.58 12.85 12.67 12.98 14.63 16.17 22.87 28.98 35.79 55.88 77.08

5 No. of Households bn 159 163 168 172 177 182 187 192 192 198 203

6 Home ownership rate % 86.42 86.46 86.5 86.54 86.58 86.62 86.66 --- --- --- ---

7Interest rates on

Housing loans % 15.5 17 17 16 14.5 13.5 13 12.15 11.35 9.85 7.65

8 Exchange Rates -- 31.37 31.4 33.45 35.5 37.16 42.07 43.33 45.68 47.69 48.4 45.97


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Ideal Housing finance mechanism


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BORROWERS/USERS

Supply of credit Housing credit portfolio Continuity of new lending Market shares Loan amounts + periods of redemption

Credit availability Collateral requirements Income ratios Number of customers Third party lending

Credit affordability Mortgage rates and fees Spreads and real interest rates Liquidity Interest rate risks


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LENDERS/INVESTORS

Investment attractiveness Maturity of investment Share of institutional investors Yields Spreads and real interest rates

Security of funds Inflation and reinvestment risk Solvency Credit risks Capital adequacy

Profitability for shareholders Cost efficiency Net income and margins Return on equity assets Cost-income ratios


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GOVERNMENT/ POLICY MAKERS

Achievable indirect benefits

Housing outcomes and national income Financial depth

Economic prerequisites Macro-economic stability Willingness

Institutional prerequisites Legislation Regulation and supervision

Sector specific prerequisites Degree of financial development Quality of residential infrastructure,

construction sector and rent level Efficient Housing Finance System Home-

ownership promotions


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Credit Crisis in housing industry

Stagflation =Recession + Inflation

Recession= General slowdown in economic activity.

Inflation =Prices go up , since worth of money is less.


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Credit Crisis?

It is a world wide financial fiasco involving the terms:

Sub prime mortgages

Collateralized debt obligations.. Credit default swaps.

Who is affected?

EVERYONE


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How?

Mortgages represent houses.

Money represents institutions(pension funds, insurance companies, mutual

funds etc.)

Homeowners

(mortgages).

Investors

(Money)

Banks andbrokers

WALLSTREET


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Earlier?

Investors , put their money in federal reserve to get treasury bills

and obtain good rate of return.

After 9/11, the interest rate was turned to only 1% resulting in bad

investment (Allen green , chairman).

Banks purchased a lot of cheap credit from federal reserve turning

to leverage(borrowing money to amplify the outcome of a deal).

Wall street made a lot profit and attracted investors.

Homeowners

Bank

(mortgages)Investors


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Home owner/Buyer

Mortgage Lender

Investmentbanker

Mortgage broker

Mortgage Housing prises rise practicall

Down payment

Buys the mortgages from

lender at a nice profit.

Home owners lend money from lenders andget a house.

Investment banker borrows money and buyslot of mortgages.

Banks started receiving a lot of money

(instalments) from home owners.


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Investmentbanker/bank.

Manymortgages

CDO(Collateralized debt obligations.

CD

O Safe. 3%

Okay. 7%

Risky. 10%

Banks insures these CDO for a fee and Credit

default swaps, is created.

Sells Safe to investors.

Sells okay to other banks.

Sells risky to risk takers of share markets.

Thus bans make huge money and repays the loan.

Everything was going fine, investors want more mortgages, calledinvestment banker. Investment banker calls mortgage lender tofind more buyers. But not much buyers in the market.


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Mortgage Lender More home buyers

No down payment,no proof of income

etc. required

As housing prices always rise, house is the security for their for their

loan.

Loans were given to less responsible people called Sub prime

mortgages.

Same process repeats, everybody making profit, until homeowners

default on payment of instalments. All cash flow to CDOs turned into houses, which people were not ready

to purchase.

As neighbourhood houses were foreclosed, and for loaned, property

prices start to fall, responsible people also sold their house and left.


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Investmentbanker/bank.

Investors

Other banks.

Risk takers.

NO

NO

NO

Investment bankers borrowed millions of dollars bonds.

No one was ready to purchase.

All CDOs remains with him.

Other banks and investors faced the same challenge.

Brokers and lenders are out of the system.

Whole system collapsed, massive bankruptcy occurred.

Moreover home owners investment also went worthless.


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THANK YOU

!!!!!

Housing Finance Methods in India

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