Pakistan is rapidly urbanizing, and the increased demand for economic housing has prompted the majority of people to seek out home financing options. Expensive land costs make homeownership difficult for the wider population, particularly for those in the lower and middle-income categories. Housing finance is given more economic and social relevance by development economists because it is still underdeveloped and underappreciated in Pakistan.
Housing is a major socioeconomic factor in most emerging countries. It is frequently the principal of wealth for the middle class. Without suitable finance alternatives, many people will be unable to afford legal housing in the face of the increased population and rising demand for housing. To fully understand the value of housing finance, policymakers must work with the private sector to address the sector’s difficulties and implement tailored housing finance programs.
Mortgage Financing: Introduction
A mortgage is a mode of financing that is secured by the collateral of specified real estate property and the lender is required to repay over time. Organizations and individuals use mortgages to buy a property without having to pay the full price upfront. Unless the borrower owns the property, the borrower is expected to pay the mortgage over a set length of time, with interest. Consider the case where the borrower is unable to repay the debt. In that instance, the banks or other lending institutions may be forced to vacate the property to sell it in or to pay off the initial debt.
Types of Mortgage
Mortgages are of certain types which change according to the terms and conditions.
- Simple Mortgage
When a simple mortgage is accepted, the mortgagee preserves the right to sell the mortgaged property if the payment is not made according to the contract.
- English Mortgage
It is described as a mortgage loan that involves the timely payment of mortgage funds and the complete transfer of the mortgaged property. The mortgagee has now taken possession of the property and can sell it without the need for a court order. The conversion is made based on the mortgagee’s transfer depending on the mortgage payment.
- Deposit of Title-Deeds Mortgage
Banks prefer this sort of mortgage since it does not require registration. The exchange is known as a house loan by the deposit of title deeds when title deeds are handed to a bank or individual agency for subsequent collateral.
- Legal Mortgage
When the loan is paid off, the legal title to the mortgagor is transferred. The stamp duty and registration fees are included in the deed registration payment.
Current Status of Housing Finance in Pakistan
Pakistan now has a 10.3 million unit housing shortage. The housing sector is experiencing supply shortages and rising costs as a result of the strong pace of economic growth and a large increase in remittances. In Pakistan, housing finance is still an afterthought. Thousands of applications for house loans are received by banks and other lending institutions each year, but the number of instances where the money is not repaid is even higher. Mortgage loans are often granted to the high-income group in Pakistan, according to a World Bank analysis, excluding people who are most in need of home finance.
Pakistan’s government established the Pakistan Mortgage Refinance Company (PMRC) and the Exim Bank of Pakistan (EBP) in 2015, each with a Rs 10 billion sanctioned paid-up capital. This concept comprised both Islamic and traditional financial models. The typical loan amount given by banks remains in the range of 2 million to 8 million rupees, which is significantly less than the average cost of a home in large cities. As a result, the majority of banks and lenders demand the borrower to pay a significant deposit as a down payment on the mortgage.
Government Approach towards promoting Mortgage Financing
Since 2001, the government and the World Bank Group have held a panel discussion to promote home finance in Pakistan. The government has relaxed and strengthened the mortgage lending industry by removing regulatory barriers and creating a framework for speeding up the loan procedure. To encourage real estate business and housing finance in these trying times, the Naya Pakistan Housing Program has incentivized 100 thousand homes for banks and the building industry. Loans under the project have a cap of Rs 2.5 million and a fixed rate of 12%, however, the Asian Development Bank has refused to make loans under the new housing scheme since Pakistani legislation does not allow the bank to recoup money if the borrower defaults.
The Pakistan Mortgage Refinancing Company (PMRC) acquires and guarantees mortgages from banks. When a bank sells a loan to PMRC, it provides liquidity, allowing the bank to lend out more loans to customers, thus expanding the mortgage market. Overall, the mortgage market in Pakistan is growing rapidly, and more banks are joining the PMRC in applying its plan for long-term housing finance expansion. Mortgage finance, according to Pakistan’s State Bank, is an effective solution to address the country’s housing backlog.
How to apply for a Mortgage?
The process of obtaining a house mortgage loan begins with the completion of an official application to one or more mortgage lenders. The lender requests verification that the borrower is financially capable of paying off the loan. Bank statements, the most recent tax returns, and proof of current employees are all examples of acceptable evidence. The application is accepted if your required documents are comprehensive in all aspects.
When a buyer and seller have reached an agreement on the terms of their property transaction, they or their real estate agents meet for a settlement. Once the down payment is made, the seller agrees to transfer ownership of the property to the buyer and receive the agreed-upon sum of money.
For Pakistan’s poor and middle-class families, affordable housing remains a dream. They can’t spend a lifetime’s worth of savings on a home when prices continue to climb according to market speculation. A mortgage is typically thought to be a cost-effective borrowing strategy because interest rates are lower than other forms of loans. However, the private banking industry is ill-equipped to deal with the demand for housing loans and cannot invest a considerable sum in mortgage financing. To overcome this gap, the Pakistan Mortgage Refinance Company (PMRC) was established to provide secure mortgage funds to both Islamic and conventional banking. As a result, Pakistan is taking initiatives to improve home finance by making it more widely available.