The dream of owning a house–a safe space which reflects one’s personality– is becoming a reality for Indians because of the country’s booming housing market. Indians are increasingly aspiring to buy homes, and luckily, home loans are making those aspirations achievable. The Reserve Bank of India states that outstanding home loans stand at Rs 27.22 lakh crores as of March 2024, up from approx Rs 17.26 lakh crores two years back. This trend reveals the increasing desire for homeownership driven by rising income levels, urbanisation, and preferences for bigger living spaces after the pandemic, says Angad Bedi, CMD, BCD Group.
Currently, buyers have varied home loan options from banks and housing finance companies (HFCs). Home purchase loans are the most popular commercial loans available. They enable the borrower to buy either a new property or a resale property. In contrast, home construction loans are for landowners who intend to build houses and wish to apply for a loan that is disbursed in stages commensurate with the rate of construction. Similarly, home extension loans are developed for people with an existing dwelling unit but are confined to making this unit bigger by extending it.
Indians’ growing aspiration to own a house makes the home loan market highly competitive. However, applying for a home loan can be a challenge. An applicant’s creditworthiness is a major consideration analysed by lenders through credit score analysis. To qualify for a loan, an individual must have a good credit score. It indicates that he or she manages finances well.
The loan-to-value ratio is another key factor. It measures what percentage of the property’s value is financed by a loan. Lenders generally finance 80-90% of a property’s purchase price. The remaining 10-20% must be paid upfront by the borrower as a down payment. Employment status, income level, and type of interest rate being adopted–fixed, floating, or both–also determine the chances of getting the loan and at what interest rate.
Public sector banks dominate housing finance for loans below Rs 75 lakh, but private banks and HFCs are also gaining traction, especially for loans exceeding this threshold. This competition drives better rates and a wider range of options tailored to diverse borrower profiles.
FinTech companies are also transforming the way home loans are applied for. They are empowering homebuyers and investors with a range of services–from helping borrowers find the best loan rates to lending financing for down payments and even the interiors of homes.
These tech-driven companies leverage data analytics and digitisation to streamline document verification procedures and offer pre-approved loan options. Consequently, they facilitate faster approvals, more transparency, and easy access for those residing in underserved areas with fewer banking facilities. Consequently, the increasing housing loan disbursal will likely have a ripple effect on India’s realty sector. This influx of capital will likely stimulate construction activity, boost housing supply, and bridge the existing demand-supply gap.
Housing loan markets are attracting a lot of investors. Institutional investors are becoming more interested in HFCs and non-banking finance companies (NBFCs) serving the underserved segment. As savvy underwriters who understand this segment’s underwriting challenges and can deal with micro-market dynamics, they make attractive investment prospects. This increased investor confidence is a positive sign for the long-term sustainability of the housing market.
While India’s home loan market presents an optimistic picture, challenges persist. First-time homebuyers in major cities are particularly concerned about affordability. In recent years, property prices have outpaced income growth. This has caused difficulties for some in pursuing their dreams of owning a home. Additionally, cumbersome regulations and complex property registration processes add to the overall complexity.
Currently, luxury and premium housing categories are doing well, but they do not change the fact that a huge chunk of the population goes unnoticed. Despite the growth in housing finance, the shortage of affordable housing, especially for Low-Income Groups and Economic Weaker Sections, stands as a major issue. Many individuals in these categories with annual incomes below INR 8 lakhs, face barriers and are unbanked. A mere 15% of the housing finance market was directed towards low-income housing loans as of March 2023, which indicates the great potential of this segment for HFCs and NBFCs.
By offering affordable housing loans with relaxed eligibility criteria and collaborating with the government’s initiatives like PMAY, these institutions can play a pivotal role in achieving inclusive growth. However, this segment requires a nuanced approach.
Borrowers’ needs and risk profiles should also be taken into account when designing loan products. Additionally, collaboration with government agencies and local builders can ensure the development of affordable housing projects in suitable locations. Also, partnerships between technology-driven firms and traditional banks are crucial for expediting loan disbursement and enhancing affordability.
There is a bright future for home loans in India despite these challenges. Housing loan credit will likely grow at an annual rate of approx 13-15% from FY 2023 to FY 2026, reveals a Crisil MI&A report. Increasing population, favourable government policies, innovative solutions in lending and FinTech companies are bound to drive this industry further. By equipping themselves with the necessary knowledge and understanding of the available loan options, aspiring homeowners can tackle the process with more confidence and ultimately achieve the dream of owning a home in India.
