The current Pakistani government’s plans to provide home solutions for affordable housing may hit a snag after the State Bank (SBP) increased its interest rate to 12.25%—as part of its latest monetary policy announcement.
The low-cost housing project – or the Naya Pakistan Housing Programme (NPHP) – is widely touted as the flagship project of the government of Prime Minister Imran Khan; who has pledged to build five million houses and apartments countrywide.
In March, Khan introduced a ‘financing facility’ for the housing project; saying his government would provide loans (up to PKR 2.7 million) at low interest rates for the NPHP project.
However, despite the Pakistani premier’s advocacy of the SBP-backed home loan facility, many citizens still seem uncertain about these time-bound provisions—salaried individuals simply do not want to get into the nitty-gritty of the lender’s terms and conditions.
But, with the government focused towards replacing horizontal structures with high-rise buildings and apartments for future settlements, more and more Pakistanis are considering the option of availing home loan facility. Moreover, the rise of middle class in major cities including Lahore and Karachi has projected the need for developing more urban settlements. According to a World Bank report, at present, the country faces a housing backlog of 10 million units.
Home loan and its types
Home loan – in simplest terms – is the money advanced by a lender to a borrower for purchasing a property or land. Of course, there are various type of home loans offered to individuals: home loan for buying a property; home loan forconstructing a house, and for home improvement.
For potential borrowers, it is important to have a constant source of income to pay back the loan in instalments over its stipulated tenure. Many first-time borrowers fail on this front as they don’t have the money required to pay back the loan over its scheduled tenure—some even struggle to meet their instalment deadlines.
Having a permanent source of income is a mustif you are opting for home loan. Your contractual status with your employer should be as important to you as it is to the financial institution concerned; brief stints at workplaces may have negative implications for your credit rating.
Determine the loan amount & payback period
Each financial institution has different criteria with respect to eligibility, financing range, and loan tenure. Private banks such as Habib Bank Limited (HBL) provide loan amount ranging between PKR 2 million and PKR 40 million for a duration of up to 20 years. Property portals such as prop.pk have already introduced an online calculator for users to calculate their house loan.
Development finance institutions (DFIs) including the House Building Finance Company (HBFC) also offer financing facility for low and middle-income groups and businessmen, for a stipulated timeframe ranging between three and 20 years. The said company recently announced a fixed-rate loan scheme for purchasing and constructing houses and apartments.
The growing need for housing finance has also resulted in a large of Islamic banks, which now collectively dominate 15% of Pakistan’s banking sector, providing home loan facilities. Bank Islami, Dubai Islamic Bank, and Muslim Commercial Bank (MCB) are the major financial institutions that specialise in this form of banking.
These banks utilise two types of models based on the concept of Islamic finance: Diminishing Musharka(in which banks acts as the co-owner of the client’s property until it is fully purchased in the long-term) and Ijarah(where the bank makes payments for client’s property, who pays back in the form or rent).
Watch out for volatile interest rates
As discussed above, a spike in interest rate is a discouraging sign for borrowers seeking housing finance facility. The recent announcement by the central bank with regard to interest rates may have diminished the morale of the majority of the Pakistani populace.
Currently, the Karachi Inter-Bank Offered Rate (KIBOR) is around 12.64% for one year which does not allow financial institutions to extend loan at low interest rates for provision of houses in the country—the higher the mark-up/interest rate, the more expensive your loan is going to be.
Private financial institutions are charging higher interest rates on home loan when compared with the rates charged by the government-backed departments. Furthermore, your credit rating is one major factor that can affect your interest rate. Banks and DFIs go into deep lengths to check the credit score of the borrower—they can’t possibly lend money to someone who has a poor track record of paying off debts.
On a conclusive note, the responsibility to educate the citizens about housing-related matters including home finance lies on part of all stakeholders concerned, especially the government. Although the Pakistani premier has announced ambitious plans to address the housing crisis, the real challenge is to implement these policies.