Mortgages in Pakistan: Navigating Home Financing
The market of mortgages in Pakistan has been developing more steadily over the last years since the country strives to meet the needs of housing finance.
Purchasing a house is a major dream for most Pakistanis, yet property rates are high and, more importantly, credit facilities are scarce.
This blog will look into the current situation of mortgages in Pakistan, the available mortgage products, the issues and prospects of this market.
1. The State of the Mortgage Market in Pakistan
Actually, mortgages in Pakistan is still in nascent state comparing to number of developed countries all over the world.
In the past, the mortgages in Pakistan has underdeveloped due to reasons including; low penetration of financial services especially to the rural folks, low understanding of basic financial instruments, and finally the problem of housing deficit.
The ratio of mortgage to GDP percentage still is under 1%, while the developed countries it can reach 20 % – 50%.
But the worsening trend has been recently compounded by the government and financial institutions that appear to have woken from slumber and are looking for ways to finance homes.
Some of the latest measures by Pakistan’s government include; The Naya Pakistan Housing Scheme which entails constructing houses for the low and middle income earners.
State Bank of Pakistan has also laid some guidelines for the enhancement of mortgage credit facilities by lowering down the mark-up rates for housing loans and initiating refinance facilities on low cost housing corridors.
Real estate sector also is preferred investment in Pakistan primarily because of the scarcity of other investment opportunities coupled with high returns on property investment.
This trend has led to the enhancement of mortgages, everyone wants to take a loan from the bank to buy his or her house instead of paying for it wholesale.
2. Types of Mortgage Options Available
In Pakistan, due to effectiveness of mortgage products, offered by banks and other financial institutions, with the market needs cover.
Some of the common types of mortgages in Pakistan available include:
Fixed-Rate Mortgages:
But in the fixed rate mortgage scheme, the interest rate charged on the borrowed amount of money remains constant over the whole period of loan.
This type of mortgage makes it easier for the borrower to plan in terms of monthly payments because the payments rise and fall with interest rates.
Nonetheless, fixed rate mortgage contracts more costly than variables because lenders factor in the variability of rates over time.
Variable-Rate Mortgages:
They are also referred to as flexible-rate mortgages and these loans’ interest rate fluctuates depending on certain intervals of time.
As much as variable-rate mortgages give a cheaper starting point than fixed-rate loans, one is bound to hit the ceiling of a cheaper rate, hence increasing costs within limited months or year that is taken in paying the mortgage.
Islamic Home Financing (Shariah-Compliant Mortgages):
In Pakistan, there is a large number of Muslims, and therefore, Islamic home financing options, which are legal under Shariah law, are available.
These products carry no interest (riba) but are profit and loss sharing or a rent seeking game.
In this regard, the most widely used structures are Musharakah with diminishing proportional ownership of the bank and Ijara, or lease.
Islamic mortgages in Pakistan are preferred by clients who wish to use only Islamic finance guidelines when using the mortgage.
Government-Sponsored Schemes:
Naya Pakistan housing scheme provides concessionary finance to low-income earners, where it provides affordable rates for both interests charged which is quite low and the period taken to repay the loan granted.
The scheme is supposed to ensure the owners of such houses receive an opportunity to afford to own houses through affordable houses and affordable credits.
3. Challenges and Opportunities in the Mortgage Sector
While the market of mortgages in Pakistan is growing, there are several challenges that need to be addressed to ensure its sustainable development:
High Property Prices:
Currently, acquiring an ideal house in some big cities including Karachi, Lahore and Islamabad becomes a herculean task due to rising cost of real estate.
Again, the high property prices in view of restricted mortgage financing makes it difficult for first time home buyers especially newcomers in the lower income earning brackets.
Low Financial Literacy and Banking Penetration:
Missing awareness of mortgage products and the banking service means that a considerable part of the population denies itself a home finance market.
There is evidence that increased financial education and extending credit facilities to the rural and less developed regions will go a long way in raising mortgage rates.
Legal and Regulatory Barriers:
Mortgages in Pakistan is not as easy as it is in other countries because of complicated paperwork, problems in property registration, and little reliability of the land records.
It was concluded that reducing formalities necessary for the provision of legal and regulatory support can facilitate mortgage financing.
However, the sector of mortgages in Pakistan also has its prospects; the mentioned challenges.
The government’s call for more housing stock, especially affordable housing, is expected to fuel mortgage growth while the central bank’s policy support stabilizes the growth of the industry.
The country should recognize housing finance products and enhance the legal environment to achieve enhanced homeownership levels and facilitate economic growth.
Conclusion
In conclusion, mortgage market in Pakistan is gradually coming up with more varieties of products on offer and government working toward bringing more and more people into home financing.
Of course there are still problems, or at least high hurdles to leap: high property prices and regulation are two big examples, but the work towards establishing housing finance systems that are more accessible are a better future.
Also read: Guide on Minimum Quality Standards for Mortgage Lending in Pakistan