A mortgage loan, with its long history, is offered by a lender upon pledging property or any other asset such as gold. Property mortgage loans are meant to raise funds to buy the property, or the owner of an existing property can raise funds for any purpose with the help of a mortgage loan. Similarly, an individual can pledge the gold he owns to raise funds for any purpose.
How Did it Start?
The evolution can be dated back to the times of the barter system where people exchanged services and goods they have for the services and goods they need. Upon the invent of money, individuals would pledge their assets for raising capital from small lenders. Once the repayment is made, the borrower can get possession of the property.
It began with borrowing money from a rich person in the locality; later, co-operative societies were formed to lend money for farming and other needs. The popularity of such co-operative societies grew, leading way to form government-recognised banks. Now, numerous banks and financial institutions are offering mortgage loans of all kinds.
Process of Pledging to Raise Funds
The whole purpose of pledging an asset to raise funds is to make the loan ‘secure’. A legal procedure is followed in evaluating the asset and fixing the lending value. The terms and conditions of the loan will be specified in a stamp paper; both the lender and the borrower are supposed to give their consent to make the transaction legal. The agreement states that the lender can take possession of the asset and sell it to pay off the loan if the borrower defaults on the loan.
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In the case of property mortgage, the process begins with the lender visiting the property. He takes the locality, property value, the age of the property, and resale value into consideration. Also, a legal advisor verifies the property documents such as the sale and purchase agreement and tax payment receipts. Once the lender is sure that there are no risks involved with the transaction, he approves of the loan and lends money.
When it comes to gold mortgage, the items to be pledged is verified for its purity and weight. Based on these two criteria, a value is fixed for the details, and when both the parties agree, a legal document is signed.
Property mortgage usually has a longer repayment term as compared to a gold mortgage. The former will have a repayment term of up to 30 years for a new property, and a refinance, it can be up to 20 years. In contrast, the repayment term is hardly two years for a gold mortgage.
Trends of Indian Mortgage Industry
In India, the mortgage sector is considered the highest contributors in the banking and insurance industry. A Morgan Stanley report said that India’s property market sales are expected to grow at a 14% compound annual rate during 2016-2020 and an 18% during 2020-2025. Mortgage industry reflects a similar growth potential as most individuals prefer purchasing a real estate property with a mortgage loan.
Government incentives and subsidies have been a big-time hit in boosting residential real estate, especially in the case of budget housing. This lead to housing credit growth of 17%-19% in the previous fiscal year as per a report.
In FY18, the housing credit grew at 16%, marking a significant milestone as compared to the 9.5% growth in FY17. The overall growth of 39% was observed in the housing credit sector over the year ending in March 2018. The report stated that the mortgage penetration level to go up by 300-500 bps over the next five years.
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in
