NationalVOLUME 17 ISSUE # 1

Home loan financing

Access to home finance has always been a serious problem in Pakistan. A middle class person cannot build a house without borrowing from banks but loans have always been difficult to come by.

But now the situation seems to be changing. Since coming to power in 2018, the Pakistan Tehreek-i-Insaf (PTI) government has been trying to promote the housing sector, and has set the target of building 10 million housing units in the country. To this end, it has taken a number of initiatives in cooperation with the State Bank of Pakistan (SBP) to make access to house finance easier for the general public.

With this objective in view, a sum of Rs30 billion has been earmarked for the Naya Pakistan Housing Development Authority, which will be utilised for providing a subsidy of Rs300,000 to low-income groups. Secondly, a refinancing scheme at cheaper rates was unveiled a few months ago by the State Bank of Pakistan.

The central bank has extended a special credit line to banks starting at one per cent cost of capital, which are then mandated to lend to customers at fixed rates for two windows of five-year periods, after which the markup will be based on the variable Karachi Interbank Offer Rate plus a spread that varies across tiers.

A fixed markup rate is important from the borrower’s point of view to avoid an increased burden on the borrower resulting from fluctuations in something long-term like housing. For instance, KIBOR 6M stood over 13% just at the beginning of March 2020, before coming down to around 7.5% towards the end of April. The problem becomes acute when the bank rates go up.

An important factor is that the criteria for accessing the housing loan have been made easy. Any first-time home-owning person holding a valid Computerized National Identity Card (CNIC) is deemed eligible. Salary requirements have been kept low along with provisions to club the income of up to four individuals.

There are four tiers – from 0 to 3 – each with its own financing limit and interest rate. Tier 0 is meant for microfinance banks and applicants can borrow a maximum of Rs2 million at 5% for the first five years and 7% for the next five years. The second slab – Tier 1 – is the only option available exclusively for the government’s much hyped NAPHDA projects with a loan limit of Rs2.7m and a cap on the housing unit’s price at Rs3.5m. This category also has the cheapest markup rate at 3% and 5% for the first and second five-year periods, respectively.

The remaining two categories – Tier 2 and 3 – set maximum loan amounts at Rs6m and Rs10m respectively at interest rates of 5%-7% and 7%-9% with no cap on the price of unit, along with a temporary relaxation until March 2023 i.e. that the house may not necessarily be a new construction. The first three slabs prescribe that the size of the house should not be bigger than 125 sq yds (5 Marla) or a flat up to 1,250 sq ft (or in case of Tier 1, 850 sq ft). Tier 4 is much more lenient as it allows a maximum property size of 250 sq yd for a house or 2,000 sq ft in case of a flat.

As we know, Pakistani banks have been traditionally reluctant to lend for house building. Against this backdrop, the State Bank of Pakistan has mandated that at least 5% of their lending portfolio should go to housing/real estate. Media reports say that the government’s new housing strategy is working. The entire process from request to approval takes less than two weeks. It is said that financial institutions have become more accommodating and they have relaxed the conditions for Tier 2 and 3 by eliminating new construction requirements and raising the financing limit for the latter.

However, this relaxation on old constructions is only until March 2023, after which any activity in the housing finance will depend on new supply. For that, the government is hoping its amnesty to builders will help, but looking at the grandeur of projects currently listed with the Federal Board of Revenue (FBR) so far, there is a reason to believe that many would be beyond the reach of an average citizen, forget the lowest income group.

Property prices are already on the rise, having gone up by over 7pc over the last 12 months to Rs13,745 per sq ft in Karachi, according to Zameen’s index. The picture will be much clearer when the tier-wise applications and disbursements data are released to see if the scheme is creating its intended impact or not. The situation needs to be closely monitored to arrive at a rational decision.