Mortgage Industry in future

Mortgages are a very common term nowadays and I am not sure people have really understood the real meaning of this term. I can explain that a mortgage is nothing but loan given by any financial institution, upon the accepting a real property as the collateral. The purpose of this can be purchase a home, for business needs, to meet personal expenses, constructing new homes etc.

When we discuss about the difference between US mortgage and Indian mortgages, we need to consider different terms associated with it.

The first term is Mortgage Backed Securities (MBS). Most of the US mortgages are converted into sold in secondary market and converted in Mortgage backed securities. To facilitate this the public agencies such as Fannie Mae and Freddie Mac play vital role. When it comes to India, even now less than 1% of the mortgages are being converted into MBS. In India this is mostly been facilitated by National Housing Board (NHB). That too they sell mostly through HDFC Ltd. Indian mortgages are mostly could be called as home loans.

Second is rate of the loan. As you all now the lending rates in US is much cheaper than India and that makes a huge driving force in US mortgage market. The average interest rate of US mortgage rate is 3 to 4.5% APR. Whereas in India the average bank lending rates are varied from 10 to 12% per annum. But we can be optimistic that the lending rates of mortgages in India may come down in near future as economy is improving in the recent years.

Third term I would like to discuss is term of the mortgage loans. In US most of the loans are for term of 360 months, means 30 years. But in India the term of normal mortgage loan is 20 years. It is significantly important that as the rate of Indian mortgages are high, people prefer for a term that is minimum as possible.

Next term we need to discuss is the scope or future of Indian and US mortgages. When we consider US mortgages, it is steady and would not be having a significant growth in the sales of mortgage, as the US market is already a grown one. But when we look at Indian market for mortgage sales, 210 million new urban Indians will need about 60 million new homes by 2030. It should be kept in mind that India already need 21 million homes as of now to meet the current demand in urban areas. So, urban India needs 81 million new homes by 2030, or an average of 4.5 million homes per year. It comes roughly 12 times of US mortgage sales output. Keep in mind that this figures only the urban India statistics in case of mortgage. This is a huge potential and shows a massive opportunity for Indian financial institutions in the coming years for selling mortgage loans.

Finally, the US mortgage industry is a well regulated and structured industry. It has all the applicable rules and regulations to make sure that different financial institutions follow uniformity in different stages of mortgage loan processes. But in India it still needs to be structured and regulated. Examples are common set of rules to be followed at the time of loan application, a common loan application form, a standard mortgage loan agreement etc. It can be expected in the near future that there is a standard procedure would come in place and government of India would take necessary steps to set up this.

----------- JOJAN MATHEW, Market Analyst