Why is a home loan (mortgage) cheaper than gold loan?

Question

I am not sure if this is a India specific issue.

I understand that gold is a basically non-value add asset and real estate business generates jobs and people do need houses to live in.

My doubt is whether Govt./Reserve Bank of India gives any explicit incentives to banks to offer cheaper home loans ?

If it were just demand/supply, I feel that gold loans should have been cheaper as people (atleast Indian people) still love gold due to inflation and other macroeconomic crises that happen from time to time.

This is just my hunch, it would be great if I can find some infographics/data on this issue...

Answer 1

My doubt is whether Govt./Reserve Bank of India gives any explicit incentives to banks to offer cheaper home loans ?

Currently NO. In the past Loan against GOLD was considered priority sector lending [Loans to poor and agriculture etc]. Every Bank need to lead around 25% to priority sector. Hence quite a few Banks gave loans relatively cheaper to todays rate rather than giving it as Farm loan that almost never get recovered. It is no longer the case now as Loan against GOLD is not considered priority lending.

If it were just demand/supply, I feel that gold loans should have been cheaper

It is demand and supply. There are quite a few reasons for this;

• The ticket size is small compared to Home Loan, typically 10 times lesser. This means more operating cost.
• The duration of loans is less, typically max of Year often around 6 months, means more liquidity management, more cost of churn. Home Loans are typically 20 years.
• Physical storage related costs. One has to keep the jewellery on-site in safe vaults. It can be to away as the customer may want it immediately. Compared to this the Home Documents can be vaulted away in low cost warehouse outside the city.
• Different Risk valuation. A person asking for Loan against GOLD indicates he is going through tough times and hence more risk of non payments. i.e. he is selling asset to meet expense requirements. Home Loan on the other hand indicates the person is in good times has surplus cash after expense and hence creating more value.

Answer 2

Why is a home loan (mortgage) cheaper than gold loan?

It has to do with risk. Lending money secured by gold is inherently riskier than a loan secure by your home.

Increased risk means the lender must charge more. That's why home loans are cheap compared to loans for other purposes.

Home loans are secured by the house. Houses are assets that hold and usually retain some value. Houses are easy to track down (they can't be hidden or moved) in the event that you don't repay your loan. Houses are reasonably liquid, they can be resold to pay off a defaulted loan.