Understanding Housing Finance

Post budget and with various housing finance schemes launched for affordable housing, the home finance seem to have become attractive for the common home buyer.

The Budget 2018 proposed allocation of a dedicated affordable housing fund in collaboration with National Housing Bank supported from a priority sector lending and fully serviced bonds authorised by the Government. Budget 2018 also announced several incentives for the poor, by increasing allocation for the EWS and the LIG to Rs 10 billion and doubling the subsidy amount to Rs 8 billion. This is further expected to boost the demand and supply of low-cost homes.

The PradhanMantriAwasYojana (PMAY) scheme available for first-time home buyers aims to provide 20 million houses for the urban poor by 2022, disbursing financial assistance of Rs 2 trillion. To boost the inventory of affordable homes by FY19, the government plans to build 51 lakh homes in rural areas and has provided assistance to construct 37 lakh home under PMAY.

The Government has already been taking several noteworthy steps to build a conducive environment for the growth of the affordable housing sector. The prevailing ecosystem coupled with powerful government reforms such as the Real Estate Regulatory Act (RERA), Good and Services Tax (GST) and the Smart City scheme.

“All the recent government initiatives have created a favourable environment for the real estate and enhanced consumer interest towards purchasing affordable homes. Considering all these factors, home loans have definitely become more attractive post Budget 2018. DHFL through its deep understanding of the target segment and strong distribution network has been leveraging these opportunities which are reflected in our steady growth,’ commented Harshil Mehta, JMD & CEO, DHFL

Mehta pointed out the factors to be considered while opting for home financing schemes.

• Eligibility: Before opting for a home loan one must assess his / her current financial liquidity and arrive at an estimated amount on how much one can afford. The loan amount should be able to derive a specific monthly instalment and repayment amount. One should take into consideration any changes that might affect future income patterns, interest rates fluctuations and the type of lifestyle. Banks or financial institutions generally give home loans up to 80 percent of the total property cost. Assessing one’s home loan eligibility is a crucial step while applying for a home loan.

• The Right Home Loan: There are various kinds of home loan schemes and for a first time borrower, the process of understanding and choosing the right home loan can be quite overwhelming. Considering that a home loan is probably the longest financial commitment for most of us, one needs to understand and be clear about the type of loan such as Loan for Purchase of Ready property, Loan for purchase of under construction property, Loans for Self Construction, Loans for purchase of plot, Loans for renovation/ extension/improvement on existing property, etc.

• Equated Monthly Instalment (EMI): The main factor that influences home loans from a borrower’s perspective is the EMI. EMI is the monthly outflow of money that will go towards repaying one’s home loan. As a golden rule one should never let their EMI exceed 40-45% of their net monthly income. Further, there are option of part prepayment on home loans without any prepayment charges, in case one’s income increases in the coming years. • The Right Kind of Interest Rate: Home loans typically come with two types of Interest Rates i.e fixed and floating. A fixed rate of interest is when the interest rate on one’s home loan remains constant for a period or in certain cases throughout the tenure of the loan. A floating rate of interest is when the interest rate on one’s home loan varies depending on the movement of cost of funds for the financial institution, the rate actually increases or decreases with the movement in cost of funds. Fixed ROI will be higher than that of a floating ROI and should be opted with caution keeping in mind the interest rate scenario. There are also options available to switch between a fixed and floating ROI anytime during one’s tenure.

• Credit Score: The credit score plays a key role for a financial institution while deriving the individual’s home loan eligibility and interest rate component. The credit score of an individual defines the credit worthiness of a person and is one of the key determining factors for an approval of a home loan. While a good credit score is one of the most critical factors for the lender to ascertain home loan eligibility, it is not the only criteria. Banks and financial institutions generally prefer to lend to borrowers with credit score higher than 750 since it reflects stronger credit worthiness.

• Government Reforms/ Schemes: Based on one’s income group, onemay be eligible for subsidy on their home loan under thePradhanMantriAwasYojana (PMAY). First time home buyers may be eligible for a credit subsidy upto INR 2.67 lakhs to build their dream home.

• Legal & Technical Clearance of the property: Every lending institution will get a legal and technical clearance of the property that you intend to purchase. This is very important not only from the banks or financial institution perspective but also from the borrower’s perspective who is investing into the property and also will be liable for the loan.

In an earlier interview with Realty Plus,KhushruJijina, MD, Piramal Finance &Piramal Housing Finance had mentioned that before opting for a home financing scheme the most important aspect is to finalize on the amount one is looking at. Buyers with good credit ratings have access to a higher loan component and have a plethora of options available.. Thus increasing the appetite of a client to go for the perfect home he/she desires for. “With interest rates now looking upwards, fixed interest loans can also be looked at in case one can strike a good deal with the lender. Such loans are however pegged at 0.5% to 1% higher rate of interest. It is also important for buyers to understand the concepts of MCLR (Marginal Cost of Lending Rate) and PLR (Prime Lending Rate) as most of the banks now offer floating interest rates linked to MCLR with clear intervals at which the interest rate would change automatically,” he said.

ArvindHali, MD and CEO, ART Affordable Housing Finance added,, “EPFO fund for down payment or loan servicing has not got much of traction as people see EPFO money for postretirement use. Another hindrance in this is the withdrawal process, which still is very cumbersome. However, millennials have started using EPFO money for making down in few urban pockets. Most of the products are available in Indian market however, popularity of reverse mortgage is yet to be seen due to sentimental attachment and asset creation culture for future generation.”

Non-banking Financial Companies

Housing as a product has slowly transitioned from an investor driven demand to more of an end-user driven demand now. In terms of housing finance products, there is a huge void in funding non-salaried class of buyers with most lenders focusing on the salaried class only.

However loans by HFC (Housing Finance Companies) and NBFCs (Non-banking Financial Companies) are linked to PLR which is outside the ambit of RBI. With lesser restrictions, they also provide buyers with more options, especially for those who fail to meet the eligibility criteria for banks.

NBFCs cater to segments which still do not fit into the purview of the banking sector. They have majorly eaten into the share of PSU banks with more than 40% share in total loans in 2017. Key attributes like better product lines, lower cost, faster turnaround time, wider and effective reach, strong risk management capabilities to quickly react to early warning signals, and better understanding of customer segments provide NBFCs with a great platform to expand their loan bases in the current improving macroeconomic conditions.

Affordable Housing Segment

With the bestowal of infrastructure status to affordable housing in Budget 2017,the sector is at the core of India’s real estate movement. Theindustry has been at the forefront addressing financial needs of the segment at the base of the pyramid. The Government’s active support in the form of tax incentives, infra status, Indira AwasYojana, Credit Linked Subsidy Scheme, GST, RERA and Smart Cities Mission is playing a transformational role in revolutionizing India’s affordable housing sector.

“This is undoubtedly a golden era for the affordable housing finance industry. With the fundamental building blocks in place and the road paved ahead for stronger growth, affordable housing finance companies focused on the LMI segment with strong heritage and a differentiated business model, are well placed to tap into this significant potential to create a legacy of transformational changes in affordable housing segment.Concerted efforts will transform the vision of ‘Housing for All by 2022’, into a reality with smarter cities, wider financial inclusion and a well-connected digital India.A strong collaborative approach amongst all participants can unleash its true potential to not only serve the LMI segment, but also set in motion a growth-driven domino effect to other related industries,’ stated Mehta.

Vinay Sah, CEO LIC Housing Finance Ltd is of the view that the creation of Affordable Housing fund is going to give further fillip to the Government’s Mission by further easing the fund flow in to the sector. Also, for Housing Finance Companies, new avenues of business have emerged especially in Tier 2 and Tier 3 cities that will emerge as strong drivers in terms of numbers. “Affordable housing is already having a significant contribution in our business. Builders have now naturally changed their approach and are quickly remodelling their business. Interests on home loan are getting affordable and the category of First Time Buyers is the biggest beneficiaries due to the added incentive in the form of subsidy through PMAY-CLSS scheme,” he added.

Indeed, housing finance sector will continue to grow between 20 to 25% every year considering the policy push at central and state government level which includes focus on various schemes like PradhanMantriAwasYojna. Having said that,the Indian real estate industry which was considered “shockproof” was badly hit by some of the policy change and is now in recovery mode post GST and RERA implementation. However robust demand in EWS, LIG and MIG segment will help industry grow at such pace backed by policy intervention such as CLSS scheme and rationalization of GST along with stamp duty and registration charges.

Expressing his opinion, Halisaid, “Mass consumption led growth in several industry comes from Mid-Income segment and the same is true for reality sector also. Further tax break in mid income segment will release surplus disposable income for investment in home upgrade for middle class population. However current policy of capping interest loss claim arising out of house property is proving to be a big deterrent for housing finance and reality business in short term. Mid income housing segment will continue to grow as buyers are real end user. However any downturn in economy will have negative impact on the sector in short terms. More and more playersare now moving towards affordable housing projects which cater to low and mid segment.

Also, though the availability of affordable Units is there in the market but still these units are mostly in the outskirts of city limits which obviously is not a preferred choice for Low & Middle income customers as the daily commute will effect both time and expenses.”

Home buyers as financial creditors

Some realty firms are facing insolvency proceedings. a high-level panel has recommended to the government. A positive news for the home buyers is the recommendation of a high level 14 member Insolvency and Bankruptcy Code panel to allow them to be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of home buyers by the Supreme Court in on-going cases. "Notably, classification as financial creditors would enable home buyers to participate equitably in the insolvency resolution process under the Code," according to the detailed report made public by the ministry. The recommendation, once implemented, would provide relief for home buyers facing hardships due to incomplete real estate projects. Home buyers will also be able to equitably participate in an insolvency resolution process.

Home Loan Basics

All banks and NBFCs in India have their own eligibility criteria a prospective home loan buyer has to meet. Most lenders require that at least 50% of your monthly income should be ready to serve the EMIs. But, having a high monthly income doesn’t necessarily guarantee you a home loan. Other outstanding loans and total outgoings are also taken in consideration.

The down payment capability should also be considered by a buyer.Most lenders require 10-20% of the home's purchase price as a down payment from the buyer. The rest, 80-90% of the property value, is financed by the lender. The total financed amount also includes registration, transfer and stamp duty charges.

As a step towards making women financially independent, currently most banks offer home loans with lower interest rate as a differential of 5 basis points to women borrowers. Moreover, a concession of 2% or 1% in stamp duty is allowed to women in most states of India.

- Home Purchase Loans: Home purchase loans are, by far, the most popular types of home loans in India. This is where an individual uses the disbursed loan amount to purchase a newly built apartment or an already constructed property. Nearly every bank and financial institution in India offers this type of loan. Each of the banks, however, follows their own interest rate policy and loan terms.

- Land Purchase Loans: Land purchase loans, as the name suggests, are used to fund the purchase of a land where an individual is planning to construct their home. Lenders usually provide a maximum of 85%-90% of its cost, while the other 15% should be put together by the applicant.

- Home Construction Loans: These type of loan is available for individuals who are planning to build a house of their own land. The application and approval process to avail this loan though is a little tricky. For example, if the individual wants the cost of land to be included as a component for the total price of the house, they must have bought the property within the previous year.

- Home Improvement Loans: Home improvement loans are taken by individuals who are unable to mobilise enough funds to renovate the house they are living in. The maximum home improvement loan an individual is eligible for depends entirely on their debt-to-income ratio and their financial standing.