The home loan market in India has grown at a rapid and alarming rate of over 40% over the period of the last four years. And from the reports from some of the industry experts, it is evident that there is very little chance that there will be any significant decline in growth rates in the future. Therefore it becomes important at this point in time to examine the key factors that have been instrumental in triggering this high growth period. There are several reasons that can be considered as having attributed to the growth of the home loan market. On the demand side, the first and the most important factor for the growth has been faster rise in incomes as compared to property prices, thus making housing more affordable.
Another important factor that has contributed to the growth of the home loan market is the declining interest rate. This factor has also been instrumental in greatly reducing the cost of servicing a loan. An additional factor is that of the Tax benefits, which have caused a further reduction of the effective cost of borrowing both on interest as well as the capital.
Examining the factors on the supply side, we see some of them have played a very big role in supporting the growth of the home loan market in India. The most important supply side factor is of more competition in the housing finance sector. This has in fact resulted in the companies charging lower interest rates. The lower interest rates are offered in fact sometimes even at the cost of the spread or profit margin.
Another important supply factor that has been responsible for the growth of the home loan marker is the fee that is charged by the financial institutions for getting a home loan. This fee has reduced dramatically over the last couple of years, from over 2% of the loan amount to as low as 0.25%. In fact, some companies are known to waive off the fee entirely.
Most of the housing finance companies in India have introduced several new home loan products in order to meet the needs of a wide variety of customers. Another factor contributing to the growth of the home loan market is the increasing collaboration between housing finance companies and builders. Such partnerships minimize service and funding related costs.