Convertible Mortgage Loan

The convertible mortgage loan industry until recently was an unorganized sector in India. But today, the convertible mortgage loan sector in India is witnessing steady growth. The size of the convertible mortgage loan business in India is estimated to be US $ 18 billion industry. Huge real estate requirements and its subsequent development has fueled its growth. The convertible mortgage loan is similar to a hybrid mortgage loan. It can be borrowed, either at an adjustable-rate or fixed-rate mortgage and even on a fixed-rate or an adjustable-rate loan. Further, the borrower of the convertible mortgage loan must keep one type of loan for a fixed time-period.

The discretion lies with the borrower of the convertible mortgage loan. The advantages of convertible mortgage loan is that this gives the borrower some control over their mortgage and this is specially applicable for fixed-rate loans that attracts pre-payment penalties. The main disadvantage of convertible mortgage loan is that there is only one-time conversion option and it is a payable option, which is time barred.

The predominant market leaders in organized Indian mortgage industry are housing finance companies like LIC Housing Finance, HDFC, ICICI Home Finance etc. Although, the estimated size of the organized commercial mortgage sector in India account only for 25% of the total housing investment in India. But commercial banks both National and Foreign Banks along with Cooperative banks and other non-banking financial companies (NBFCs) are also catching them up at a very fast pace. The convertible mortgage loan in India is consistently registering 20-50 % growth on year-on-year basis, from the year 2000 onwards. Low income groups communities are still ignorant and skeptical about its pros and cons.

The main bottlenecks that are hampering smooth growth of this industry are as follows -

• Ignorance amongst masses
• Poor accessibility
• Lengthy processing time
• Elaborate documentation

Previously, the activities of the sector were confined to financing of housing and real estate properties only but today it has extended to all possible immovable property mortgage funding. The industry is heating up and there is a mad rush for credit in urban India and the market is estimated to grow at a lightening pace in few years to come. The proportion of outstanding housing loans as percentage of GDP increased from 3.4 % in 2001 to 7.25 % by 2005. To help it grow and fulfill its huge requirements the Indian mortgage industry needs indirect government participation, as a guardian and facilitator which will accelerate the organized growth of convertible mortgage loan market in India.

Last Updated on 5/26/2011