Future of mortgage market in India
Housing, next to agriculture, continues to impact India’s socio-economic development and has been riding at the back of an increasing demand for homes. However, India’s mortgage market which looks dynamic with a flurry of banks offering loans at attractive rates but, lags far behind giant economies like US, Singapore and Thailand. Indian mortgage market presently contributes less than 10% to the GDP whereas in US, this contribution is close to a whopping 80%. Whether such a lag is for good or bad and, where are we headed in future?
Sachin Karpe will give a peek into some salient features of the Indian mortgage industry.
India‘s mortgage to GDP ratio is very low (around 8 % ) compared to US and UK ( excess of 80 % ) or China ( excess of 30 % ) Therefore mortgage market has a long way to go as defaults are very low.
How it is in India
Highlighting the way Indian mortgage markets work, Sachin Karpe says, India’s economy works on different dynamics than that of Singapore and US. India’s mortgage market is different than any other economy. Partly, because as a nation our belief is more towards saving than spending therefore, our loan to value ratio is low compared to US as more home buyers pay an upfront amount for the cost of the house in cash, which they have saved, and then opt for the loan for the rest. So in effect, the loan amount or the amount that is mortgaged is way less than the price of the house. After taking possession of the flat, buyer spends more to do up the house, raising his equity. In such, if the buyers defaults, banks always recover the money they lent by selling the house.
India vis-à-vis US
US functions differently where, mortgages are based on the interest only model unlike in India where banks calculate EMI factoring both interest and the principle amount. In US, consumers only pay interests first. In case of defaults, banks may end up booking losses if the property price has gone down. Basically, an Indian consumer finances the major part of the cost from savings and is less dependent on mortgages compared to the counterparts in US.
This shows how robust Indian economy is and how the mortgages are devised, elaborates Mr Karpe.