Mortgage, in layman’s terms, is a loan from a bank or a financial institution, granted in lieu of a tangible asset as security. The sum is paid back by the individual or business who had applied for the loan over a pre-determined time period, at a pre-defined interest rate, and get the ownership of the asset transferred after settling down the entire loan amount.
Mortgages are granted for a number of reasons such as personal emergencies, business emergencies, or even for the task of acquiring another piece of real estate.
US and Indian Mortgage Sectors
However, in spite of the definition of the term, the dynamics of the respective US and Indian mortgage sectors are largely distinguishable. Here are some of the key aspects in both that stand out in sharp contrast.
Mortgage Backed Securities
The US mortgage market comprises of a secondary tier of the mortgage market that solely caters to purchasing mortgages from financial institutions and then securities into Mortgage Backed Securities or MBS. The mortgage backed securities purchases can be a singular property or a collection of contractual debts such as residential property, business estate, etc. The secondary parties process the real estate collectives as a marketable. The Indian mortgage sector does not facilitate a mortgage backed securities market. Indian mortgages are plain referred as home loans. The National Housing Board mostly caters mortgages via private sector institutions like HDFC. Barely 1% of the Indian mortgage market sees property converted into an investable commodity like in the US market.
Rate of Interest
The US market facilitates a market which gives mortgage applicants some breathing room. This is achieved through low interest rates regime of 3-4.5% per annum. This has created a market where individuals and enterprises are not hesitant about applying for mortgages. The Indian mortgage market, on the other hand, does not cut mortgage applicants any slack, with a steep interest rate of 8.3-10%. This does not encourage residential real estate owners or even business enterprises to risk loans in the way of mortgages. The recent reforms in the Indian economy, however, do promise a more flexible mortgage market that does not force the loan applicants to break their piggy-banks!
In the US, mortgage loans are granted at a rate which is much more convenient for the applicant. Thus, pitching a high time duration to fulfill the loan does not put a strain on the consumers in the US mortgage market. Mortgages that go up to 30 years are frequently seen in that environment. However, in the Indian market, a high interest means that mortgage applicants also feel the weight of a financial burden on their chest for a prolonged period. So even with mortgage time durations that average at 20 years, which is quite less than its US counterpart, the mortgage applicants are still left in two-minds about their original decision of ever applying for the loan!
Scope for growth
The US market is already a grown one. The rate of mortgage applications per year is at par with the demand for ‘home loans’ over there. In the Indian market though, there are a whopping 210 million urban Indians seeking homes and at least 60 million homes would be required to satiate their housing needs. The target for the same is till the year 2030. With a present requirement of 20 million urban homes required immediately, the Indian market is staring down a path that facilitates 80 million homes by 2030. Given, the conditions created by the policy makers the target demographic is not very enthused in tag-teaming the mortgage institutions in meeting the aforementioned target. The market is there for Indian mortgage institutions, now they need to create the conditions where they can tap into the potential of the same.
Regulation and customer-centric parameters are what let the US mortgage sector flourish, which gives India a shining example to follow as to how to make the most of the market for both sides concerned.
About Girish Bindal
Girish Bindal is the Head of Content at Makaan.com, Housing.com & PropTiger.com . He draws from more than a decade of cross-industry experience and has worked for brands in the Real Estate, Recruitment and Consulting domain. In his current capacity, Girish is known to gel the news, numbers and opinion to drive the content consumption. With an analyst’s approach and a sharp focus on numbers, Girish has been organically progressing the brand to build a growing base of audience.