Urgent need for mortgage finance units

By Vasu

WHAT does a middle-class family do when it dreams of a home of its own? For most, the dreams turn into reality, only after garnering resources from every possible quarter. Thus savings, provident fund, fixed deposits, insurance policies, jewellery, assorted savings and share certificates are all dipped into. Often the gaon ki zameen or the ancestral home in a small town is sold before the dream of a small flat or house is turned into a reality. Unlike other countries where the government steps in with several assistance schemes to make owner-occupation a possibility, in India owning a house is a tedious process even for the relatively affluent middle class and the upper-middle class.

According to a study conducted by Cushman and Wakefield, under the existing mortgage terms, a loan of Rs 10 lakh entails an equated monthly instalment (EMI) of approximately Rs 12,600 per month or Rs 1.51 lakh per year. Thus most potential house owners do not even contemplate a house until their mid-forties. Till then, they are dependent on an erratic rental market, hampered by archaic rent control laws.

The mortgage market has been severly hit by the lack of foreclosure norms, high stamp duties, high house value to income ratios and low loan to value ratios, says the study.he time is just right for the mortgage finance markets to be opened up to make owner-occupation a reality. The market undergoes long-term benefits when a person, residing as a tenant, becomes an owner-occupier. In effect, he acquires a share in the property market and is protected from the rising trends.

Property also brings in long-term capital appreciation. Owner-occupation also curbs speculation as the end user is in actual possession and that leads to more stability in the market, besides encouraging young couples to make long-term commitments that bring stability to the social set-up. Despite the fact that government estimates say that 10 per cent of the total housing shortfall of 23 million is for the middle to upper income groups (see box), schemes have not been formulated to target this sector. This huge demand, conservatively estimated at around Rs 190,000 crore, can be met if certain modifications are made to facilitate housing finance.

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Housing finance and its availability is today hampered by several factors, including the lack of adequate loan security which blocks mortgage finance, reports the study. Overseas, to prevent defaults, a mortgage insurance is sought, where the mortgage premiums are paid along with the EMI. This raises the mortgage servicing costs but that is often offset by increasing the mortgage tenure. However, insurance companies would require foreclosure norms by which they can repossess property. To make this possible, the study suggests that if this target group avails itself of loans above Rs 10 lakh then it should be exempted from the protection of courts and bounded by the terms of the mortgage deed. The study argues that greater access to cheaper mortgage finance would benefit this sector more than the legislative protection offered to defaulters under the existing legal system. And as the segment is too small to constitute an important vote bank and too fragmented to have a political voice, it will not have self-interest groups or political parties evincing vested interest in enforcing the existing foreclosure norms for this group.

Another change required would be a change in the loan tenure. The existing time period for repayment is based on a 15-year plan, whereas abroad it can be as high as 40 years.

This would escalate the mortgage risk for the housing finance institution which can be lessened by early repayment options, which exist even now. In fact, the high interest rates of 16 to 17 per cent make it advantageous for most mortgages to exercise early repayment whenever they can. Besides, options like low start repayment option where the interest is loaded towards the end should also be formulated.

Tax benefits are available to owner-occupiers. Exemptions from capital gains tax for self-occupied houses, deduction of mortgage interest payments from income of the property up to a maximum of Rs 30,000 per individual every year are available. Besides the net loss after all deductions from income on house property can be offset against other income and carried forward for a period of eight years.

However, Rs 30,000 as interest relief is a paltry sum when compared to the interest payments of over Rs 1.5 lakh per annum. This makes renting out property more attractive to offset the entire interest payment. Thus the law in fact favours those who do not occupy their own property or those who own more than one house. Reduction in stamp duty, timing the flow to prevent sudden spurt in credit availability from having an inflationary reaction are other measures suggested by the study.

Today despite the recession in the real estate market, the supply of housing is not a constraint. The inflow of foreign direct investment, likely to result after the new housing policy is implemented, will also help the domestic market. Also mortgage funds till now have been flowing into the hands of the developer, but channelling, the funds through the consumer will translate into more realistic value levels for the developed property.