Housing Finance

The Housing Finance Company is yet another form of non-banking financial company which is engaged in the principal business of financing of acquisition or construction of houses that includes the development of plots of lands for the construction of new houses.

The Housing Finance Company is regulated by the National Housing Bank. Any non-banking finance company can operate as a housing finance company, subject to the fulfillment of basic requirements as specified in the Companies Act, 1956.

• The company should have its primary business of providing finance for housing, whether directly or indirectly.
• The company should obtain a certificate of registration (COR) from the National Housing Bank (NHB). The company conducting such business without a COR is an offense punishable under the provisions of the National Housing Bank Act, 1987, also the NHB can demand the winding up of such company.
• The company should have minimum Net Owned Fund of Rs 10 Crore.

Once these basic requirements are fulfilled, the company should comply with the following conditions to get registered as a Housing Finance Company:

• The company shall be in such a position that it is able to meet the full claims of its present as well as future depositors as and when these accrue.
• The affairs of the housing finance company should not be detrimental to the interest of the present and future depositors.
• The management of the company should not be prejudicial towards public interest or to the interest of its depositors.
• The Company should have an adequate capital structure and better income prospects.
• The certificate of registration shall not be prejudicial to the operation and growth of housing finance sector of the country.

All the above conditions must be met by the non-banking finance company to perform the business of financing of houses (construction and acquisition).

Advantages:

• Industries such as cement, brick manufacturing, sanitary products, electrical fittings and glass industries experience more demand due to house construction.
• Among the financial services, housing finance creates employment, both directly and indirectly.
• Rural housing develops not only rural areas but prevents migration of labor to urban areas.
• Factories or industrial establishments create townships by providing more housing facilities to their employees. Housing finance thereby reduces congestion in 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.
• 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.

Disadvantages:

When an analysis is to be carried out and a decision has to be reached, it is wise to oversee the wrong side. Just listing down the advantages is not the right approach. There is a wrong side to everything. Even taking a house loan has its disadvantages. Here are the most significant disadvantages for anyone who is considering going for this loan.

A Long-term Commitment:

Another disadvantage is that taking a house loan means that the repayment period will be very long. During these years, people cannot take any other loans as they will have to spend their real income on the repayment of loans. Therefore, before opting for this loan, one has to prepare themselves for a long-term commitment.

Interest:

Even though the interest rate on a house loan is lower than other loans, in the end, a person is paying way more than borrowed. When a person decides to sell their property, they will have to face loss as the right selling price will be the principal amount plus the interest paid, which is too high. It is one of the most significant disadvantages of a house loan.

Loss of Opportunity:

Loss of opportunity is one of the most significant disadvantages of house loans. With a house loan, a person cannot expect profit. If the same amount is invested in some other financial instrument, a high rate of return can be earned. It is an opportunity that many people fail to consider.

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.