What is Low Cost Housing Finance?
Low cost housing finance is a program specially designed to help families purchase or construct affordable homes.
These are customized products with lower interest rates, special terms, reduced fees and subsidized by the government or authority to support families with low income.
Here are some of the features of low cost housing finance scheme:
1. Lower or Subsidized Interest Rates:
Such low cost housing finance policy or program is considered low cost due to lower/subsidized rates.
These rates are significantly lower than the market interest rates that provide affordable installments for individual or families with low income.
These programs are usually subsidized by the government.
2. Flexible Loan Terms:
Flexible repayment terms are one of the main features of low cost housing finance program, such as longer loan durations which in turn reduce the monthly installments, to accommodate borrowers with limited incomes.
3. Financial Education and Counseling:
Many low-cost housing finance programs offer financial education and counseling services to help borrowers understand the home buying process, manage their finances responsibly, and maintain homeownership successfully.
4. Government Guarantees:
Government-backed loan programs, provide lenders with insurance against borrower default, allowing them to offer more favorable terms to low-income buyers.
Background of Low Cost Housing Finance in Pakistan
Pakistan, like other developing countries, has been facing a shortage of housing units; and this basic human need is felt more profoundly at the bottom of the pyramid comprising of the poor and financially under-served segments of the society.
It is estimated that annual demand for new homes is approximately 700,000 a year, whereas, only about half of this demand is met. Overall, the housing deficit is estimated at 10 million units and growing.
Standing of Financial Sector on Low Cost Housing Finance
The formal financial sector has been failing to provide adequate and affordable housing finance to a large segment of the population.
The combined volume of outstanding housing finance from banks and the HBFCL stands at Rs. 92.4 billion as of Dec. 2018.
The outstanding housing finance, including the staff housing loans of financial institutions, is currently equivalent to only 0.5 percent of GDP.
This ratio (referred to as mortgage depth) is low in comparison, not only to advanced economies but also to the regional developing economies of India and Bangladesh.
The Housing Finance Market
The housing finance market has been marred by both supply and demand side challenges.
Key supply side issues faced by the industry are lack of adequate foreclosure mechanism, uncertainty of title deeds, absence of innovative products, risk of maturity mismatch due to unavailability of long-term funding, and lack of skilled mortgaged bankers.
Similarly, key issues related to the demand side are escalating property prices, a dearth of financing products, unavailability of formal financial services, and volatility in interest rates.
Policy for Low Cost Housing Finance Pakistan
In line with the broader objective of promoting low cost housing in Pakistan, under this policy SBP has defined low cost housing.
The definition will be applicable for incentives that are specifically taken to promote low cost housing. Low cost Housing:
To qualify under low cost housing, the borrower has to fulfill the following criteria:
- Maximum value of the housing unit/apartment up to Rs. 3 million
- Covered area of the housing unit/apartment in urban areas up to 850 sq. ft.
- Loan size up to Rs. 2.7 million
The housing finance market faces challenges like foreclosure mechanisms, property title uncertainties, and limited financing options.
To address this, the State Bank of Pakistan has defined low-cost housing criteria, including a maximum housing unit value of Rs. 3 million and a covered area of up to 850 sq. ft.
This policy aims to promote affordable housing and expand access to finance for low-income families.