The US and India Mortgage Sectors: A Comparison

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The US and India Mortgage Sectors: A Comparison

In layman’s terms, the word ‘mortgage’ is a loan from a financial institution, which is approved in lieu of an actual asset as a security. The total sum is paid back by the individual or business owner who applied for the loan over a calculated time at a pre-defined interest rate. The borrower gets back the asset after settling down the total loan amount. A mortgage is granted for several reasons: for some, it may be personal emergencies; for some, it could be business issues; and for others, it may even be for the task of acquiring an additional piece of real estate.

How Mortgage Loan Is Different in India from the US and Other Countries

In the definition of the term, the direction of Indian mortgage sectors vs. the US and other countries can differ. We will elaborate below on how mortgage loan is different in India from the US and other countries.

Mortgage Backed Securities

The US mortgage sector holds a secondary tier of the mortgage market that entirely caters to buying mortgages from lenders and securities into the Mortgage Backed Securities or MBS. The purchase of MBS can be a singular property or a compilation of contractual debts like residential properties or business estates. The secondary parties proceed with the real estate collectives as profitable. 

The Indian mortgage sector, however, does not have an MBS market. Indian mortgages are typically termed home loans. The National Housing Board majorly provides mortgages through private-sector financial lending institutions. Hardly 1% of the Indian mortgage market experiences the property being converted into an investable entity like in the US market and some other parts of the world.

Rate of Interest

The US market boasts a market that provides applicants some comfort in loan repayment. This is because of the low-interest rates offered at about 3-4.5% every year. As a result, individuals and enterprises are not hesitant or afraid about applying for mortgages in the US market. 

On the other hand, in the Indian mortgage market, a steep interest rate of 8.3% to 10% is quite common. The rate may go down with a few lenders, but many can charge above 10% also. Hence this prevents real estate owners or even business enterprises to risk loans as a mortgage. Following recent reforms in the Indian economy, there is hope for a more flexible mortgage market, especially one that does not force mortgage applicants to use up their savings.

Loan Duration

In the US, mortgage loans are generally approved at a rate that is extremely convenient and comfortable for the mortgage applicant. Therefore, pitching for a long mortgage tenor to fulfill the loan does not pressure consumers in the US mortgage market. Mortgages tenors that extend up to 30 years are common out there. But, in the Indian market, a mortgage with a high-interest rate means that the applicant feels pressured to repay the loan for a prolonged period. So with mortgage tenors averaging at 20 years, which is quite less than the US counterpart, most applicants are left in two minds about their decision to apply for one.

Scope for Growth

Compared to any other market in the world, the US mortgage market is established. This is because the rate of mortgage applications per annum is reportedly at par with the demand for ‘mortgage loans’ over there. 

Apart from that, the regulation and the customer-centric parameters influenced the US mortgage sector to flourish. But in the Indian market, though, there are 210 million Indians seeking homes, and among them, at least 60 million homes are required to satiate their housing requirements. Till the year 2030, the target is expected to remain the same. 

With the current concern of 20 million urban homes required urgently, the Indian market is heading down a path that is seeking to facilitate 80 million homes by 2030. Given the conditions birthed by Indian policymakers, the target demographic isn’t quite enthused to tag-team the mortgage institutions in satisfying the aforementioned target. There is a decent market for Indian mortgage institutions, but they need to create conditions where they can tap into the potential ones.

Things to Consider Before Applying for a Mortgage Loan in India and Other Countries

Before one decides to avail of a mortgage, there are certain factors one should keep in mind. Below mentioned are some of these:

  • Loan amount: The loan amount gets sanctioned when one submits the residential or commercial property as collateral, and then the amount gets decided on the metric value of the property. There are other factors, like the property’s condition for sanctioning the loan amount. 
  • Interest rate: The interest rate depends upon the financial institution; however, generally, it varies between 11% and 15%. A borrower can also opt for either a floating-rate loan or a fixed-rate loan.
  • Fees and charges: There are some charges like documentation, processing, and application fees; loan overdue charges; property inspection fees; and late payment penalties. 
  • Mortgage tenor: The period for repayment, which is offered by the financial institution, can rise to 15 years. But, if a person is choosing an overdraft facility for the mortgage loan, the repayment period may get reduced.
  • Repayment schedule: The repayment schedule differs from one lender to the other. It is a good idea to use a commercial property loan calculator to insert tenors and see which repayment schedule suits you the most.
  • Eligibility criteria: The general norm for a mortgage depends on the type of employment, the residency status, the yearly income, and the borrower’s age. One should always check the terms before applying for a mortgage.

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