Housing Finance in India - Home Loan Blog - Tata Capital

Housing Finance in India

Mar 08, 2017

Purchasing a house involves several expenses, which are known as the acquisition costs. These are classified as capital expenses and transactional costs, such as taxes, documentation, duties, brokerage, and financing costs incurred for availing of the loans.

Three of these costs are mentioned below

1. Capital costs

These include land and construction expenses, on-site and off-site infrastructure, space costs, parking, and interior expenses incurred to make the homes ready for occupation.

2. Transaction costs

Properties may be purchased from a society, private developers, or public agencies. Additionally, these may be resale homes or original purchases acquired directly or through brokers. Transaction costs include expenses, such as brokerage, documentation, transfer or mutation charges, and stamp duty and registration fees.

3. Financing costs

If the purchase is funded through a home loan, the borrowers need to pay finance costs. Some of these include interest paid before the equated monthly installment (EMI) starts, legal and valuation fees, processing charges, insurance, and administrative costs. Generally, these costs are directly proportional to the home loan interest rate and the principal amount.

Funding sources in the Indian Housing Finance sector

Housing finance companies and commercial banks have different sources for availing of funds. Commonly funding is provided by three types of institutions, which include refinancing companies, primary lenders, and the secondary mortgage market.

1. Refinance companies

These include institutions like the National Housing Bank (NHB), National Bank for Agriculture and Rural Development (NABARD), and other funds like the Life Insurance Corporation of India (LIC).

2. Primary lenders

Some of these are rural banks, commercial banks, cooperative institutions, and microfinance companies.

3. Secondary mortgage market

Often include institutional investors.

The most important funding source for banks includes deposits in current and savings accounts and securitization. Housing finance companies (HFCs) raise funds through deposits, refinancing from the NHB, and domestic and international borrowings. Cooperatives in the country are most commonly funded by LIC, NHB, and General Insurance Corporation (GCI).

Key challenges for the Indian Housing Finance Sector

The formal housing finance sector in the country is limited to organized sector personnel and taxpayers. As a result, a huge proportion of this financing need is met through the informal sector. This is more prominent in rural areas where the access to formal funding is difficult.

Here are five key challenges faced by this sector

  1. Having access to long-term and low-cost sources of funds
  2. Procuring access to reliable credit histories and land records
  3. Developing technical innovations and standards
  4. Minimizing constraints through state laws
  5. Extending finance to low-income group and economically weak borrowers

During the last two decades, the housing finance sector has significantly evolved. Nonetheless, some steps need to be taken to eliminate the challenges faced by this sector. Improvements like creating a reliable database, addressing long-term funding concerns, implementing valuation standards and uniform codes for improved transparency, product innovations, introducing safety norms, and increasing consumer awareness would play a vital role in the growth of this sector.