Define Housing Finance

Introduction

Urbanization becomes a popular trend in developing countries in recent decades. This trend is both a source of development opportunities and challenges for the housing sector. Many developing countries are facing the problem of poor housing conditions on one hand and witnessing a large and growing market for housing on the other hand. This is because of inadequate housing policies, improper property registration and limits to access to housing finance. Therefore in recent years, developing countries are giving more importance to promote housing finance.

Housing finance is a fund based financial service. In India, Housing finance was largely provided by Government till the mid-eighties. In 1988, RBI established a fully owned subsidiary bank namely National Housing Bank (NHB) exclusively for housing finance. The role of NHB is discussed later. Let us see various types of housing loans and lending practices in India.

Types of Housing Loans

Home Equity Loans: Loan is provided to customer by mortgaging the existing house property at the market value for any purpose.

Home Purchase Loans: The Loan is provided exclusively for the purchase of Apartments or individual building both new and old.

Land Purchase Loans: Loan is provided for the purchase of land and construction of residential houses.

Home Extension Loans: This loan is provided for construction of additional rooms or other facilities.

Home improvement Loans: It is provided for renovation of old house.

Lending Practices of Housing Finance

Interest Rates

There are two types of interest rate system namely fixed and floating interest rate system. Under fixed Interest rate system, interest is fixed for a particular period of time. Beyond such period interest rate may fluctuate based on RBI directions. (E.g. Mr. X takes housing loan for a repayment period of 20 years under the fixed rate system. There is no change in the interest rate for the first 5 years and it fluctuates thereafter based on the directions of RBI.) Under floating rate system, the interest rate fluctuates frequently based on bank rate. The rate of interest differs under different slab system based on amount and repayment period.

Security

The title deeds must be mortgaged with the lender for the security purpose.

Processing Fee

To meet the operational expenses, lender charges 0.50 % of loan amount for processing housing loan.

Equated Monthly Installment (EMI)

It is a fixed monthly repayment of housing loan. Borrower of the housing loan repays to his lender in the form of EMI over a period of time. The EMI amount depends on the rate of interest, the loan amount and the repayment period. The tenure of the loan can be reduced increasing the EMI amount. EMI covers both principal and interest component.

Pre Close of Housing Loan Account

Normally, the repayment period of housing loan may be 5,10,15,20 or any number of years at the option of the borrower. The borrower can pre-close the housing loan at any time paying the balance amount in full. The lender charges 0.50% or 1% on outstanding loan amount on the date of pre-closure for premature closure of loan account. The borrower is free from his liability towards repayment of principal amount and payment of interest amount for the remaining period.

Advantages of Housing Finance

Even lower middle class people can become the owner of the property

Easy and convenient method of repayment (EMI) with lower interest rate is possible for borrower.

The borrower can get bulk finance at the time of purchase of house and the same can be mortgaged as security.

It creates greater employment opportunity both directly and indirectly.

The demand for construction materials like cement, brick, sanitary products, electrical fittings and glass industries is rising day by day due to construction of building.

Housing finance paves the way for infrastructure development. The borrower can avail income tax exemption under the Income Tax Act for the repayment of loan (both principal and interest) subject to certain limits.