Things you need to know about mortgage housing in Pakistan
Pakistan has been one of the hardest countries to secure a home loan. Very few banks offer and keenly market mortgages, and those that do often have tedious and discouraging conditions. As a result, home mortgage in Pakistan has historically been as low as the equivalent of just 0.3 percent of the country’s total gross domestic product (GDP).
However, this figure has started to improve gradually owing to the ruling government’s initiatives aimed at easing the access of Pakistanis to homeownership. The government of Pakistan has launched an ambitious push to build 5 million affordable homes under the Naya Pakistan Housing Scheme and accordingly relaxed various banking rules governing mortgages, making it more convenient for low-income families to secure home loans.
What is a mortgage?
The term mortgage originates from the financial system of lending. It is a typical loan that is used to purchase or maintain a home, land or other types of real estate. In mortgage financing, the borrower unconditionally agrees to pay the lender over time, normally in a series of consistent payments that are consolidated to form a figure higher than the original amount of the loan. The property itself acts as collateral to secure the loan.
A borrower is required to apply for a mortgage loan through any of the reliable lenders while ensuring that the requisite conditions and requirements are entirely met including minimum credit scores and down payments. Mortgage applications are passed through a rigorous underwriting and review process before they are approved. The types of mortgage loans vary based on the needs of the borrower, for instance, conventional and variable rate loans. However, in countries like Pakistan, mortgage financing is remodeled in the light of various principles in accordance with the country’s banking system and economic dynamics.
How mortgages work
Individuals and businesses around the world utilize the mortgage financing model to buy real estate without having to pay the entire purchase price upfront. The borrower repays the acquired mortgage loan with an additional amount over a specified period of time in a series of regular payments until they own the property free, clear, and by all legal means. Mortgages are also known as claims on property or liens against the property. If the borrower stops paying or fails to pay the mortgage, the lender holds the right to foreclose on the property.
The Mortgage Process
The acquirers of a home mortgage loan initiate the process by submitting an official application to one or more mortgage lenders. The lender asks for evidence proving that the borrower is capable enough of repaying the loan. This evidence may include bank statements, the latest tax returns, and proof of current employment. The lender will also run a mandatory credit check, as well.
If your required credentials are complete in all aspects, and hence acceptable, the application is approved. The lender will proceed by offering the required amount of loan at a certain rate of interest. However, the fixed interest is a reason why many people in Muslim countries strongly oppose the acquisition of bank loans. Alternatives to interest such as other financing models are yet to drive inroads in convincing the people.
Homebuyers can also opt to apply for a mortgage after selecting the property they are looking to purchase or while they are still in hunt of the right property, a process known as pre-approval. Being pre-approved for a mortgage can enable buyers to keep an edge in a demand-sensitive housing market where sellers need complete surety whether the buyer will have the money to back up their offer.
Once a buyer and seller agree on the terms of their property deal, they or their real estate agents meet at what’s called a closing. This is the meeting where the down payment is made by the home buyer or on his behalf to the lender. Once the down payment is received, the contract mentioning all terms is signed and the seller agrees to transfer ownership of the property to the buyer and receive the mutually agreed sum of money. Accordingly, the buyer signs any other mortgage documents as required.
Purposes and types of mortgage loan
A mortgage loan is acquired by borrowers for multiple purposes; however, all of the applications of mortgage loans fall within the real estate sector. These loans serve as assistance to purchase a property. Some of the most common mortgage purposes and types include:
New home construction
This type of mortgage loan is extended to people who already have a piece of land in possession and need financial support to meet the cost of constructing a house on that land. The disbursement of this mortgage type is made in tranches throughout the construction phase by evaluating the Bills of Quantities (BOQs) submitted by the mortgage applicant duly verified by an approved valuation agency authorized by the bank.
Purchase of plot and construction
This form of loan is granted to the customers who are looking to buy a plot for the purpose of constructing a house on that plot. The disbursement of a certain amount of this loan is made upon the purchase of the plot by the customer, and then the rest of the amount is released in tranches during the construction phase by evaluating the Bills of Quantities (BOQs) submitted by the mortgage applicant duly verified by an approved valuation agency authorized by the bank.
As its name suggests, this type of mortgage loan is acquired for the purchase of a house that is already constructed. This can either be a pre-owned house or in the other case a newly constructed one.
This mortgage loan is extended to those are already possess the ownership of a house, and need funds for renovation. The disbursement of this loan is made in two tranches once the borrower has provided BOQs duly verified and authenticated by an approved valuation agency authorized by the bank.
Home mortgage in Pakistan
A most recent study by the Pakistan Housing Finance revealed the fact that there is a healthy demand for a house mortgage loan in Pakistan driven by the upper-middle-class families in various cities around the country. The report studied 26 Pakistani cities and found that with the right products, systems, funding, and less strict terms, lenders could potentially have approximately 500,000 new borrowers. The study set the tentative value of the mortgage market at around $4 billion with growing inroads in the country’s financial system driven by favorable government incentives.
Property mortgage loan in Pakistan has never been a popular choice historically. This is because Islam strongly forbids both the borrowing and lending of money in exchange for interest, which means that borrowers end up paying a much higher amount in return for the actually acquired figure. Therefore, the majority of Muslims prefer to avoid typical mortgages when buying property. Instead, they go for alternatives such as rental or leased houses.
Nevertheless, in recent times, with government-driven initiatives and incentives aimed at helping the lower middle class buy a house of their own, we have seen a significant surge in the number of mortgage loans acquired during the ongoing financial year.