Introduction to Housing Finance:
India’s national housing policy insists on providing more dwelling houses to the citizens. It is only natural for the government to create institutions which can provide housing finance.
At the international level, institutions such as World Bank and Asian Development Bank provides both grants and loans, especially soft loans for removing slums and for the creation of housing colonies. In fact in India, the World Bank has financed Sites and Service Schemes to a number of state governments, thereby, both housing and promotion of small scale industries are simultaneously encouraged.
Advantages of Housing Finance
- Among the financial services, housing finance creates employment, both directly and indirectly.
- Industries such as cement, brick manufacturing, sanitary products, electrical fittings and glass industries experience more demand due to house construction.
- Rural housing develops not only rural areas but prevents migration of labor to urban areas.
- Housing finance helps in creation of more houses which results in building up more infrastructure facilities, such as roads, electricity generation, drinking water facilities, etc.
- Factories or industrial establishments create townships by providing more housing facilities to their employees. Housing finance thereby reduces congestion in urban areas.
- Due to housing finance, there is a vertical expansion and re building of dilapidated houses and re modelling of the existing houses.
- Housing facilities not only improve, they also reflect the culture of the country. Chandigarh city is an example for modern housing which has been built by a French architect.
- Non conventional energy gets popularized due to modern housing facilities which is one of the major benefits of housing finance.
Methods of Housing Finance
Commercial banks and co-operative societies are providing housing finance. Life Insurance Corporation is also in the race for housing finance.
While providing housing finance, the lender and borrower enter into an agreement under the Transfer of Property Act, whereby the house to be constructed is mortgaged along with the land to the creditors who is called mortgagee. The borrower is the mortgagor and he cannot sell the house to any third party until the loan is repaid. In other words, the financing institution has a charge on the property of the borrower until he repays the loan.
When the housing loan is repaid, the mortgage is lifted and the ownership of the house is transferred to the owner. The owner has now an absolute right to transfer or sell to any party he likes. In the case of granting housing loan to existing houses for the purpose of rebuilding or expansion, the house will be mortgaged to the financing company, till the loan is repaid.
Tax benefits that boosts housing finance in India:
In order to encourage more house construction in India and to boost housing finance, the Income Tax Act provides concession to the assesses, under which INR. 30,000 can be availed as tax relief if housing loan was availed for house renovation work, and if loan was availed for construction purpose, the interest payment up to INR. 200,000 per year can be written off from the gross income and the principal paid is covered under section 80C while computing the income tax. Though the Kelkar Committee has recommended to the government to withdraw these concessions, it is doubtful as to how far government may agree to these recommendations.