Pakistan’s House Finance Market
In Pakistan mortgage finance is a relatively small sector, which is developing slowly. Currently, mortgage finance facility is being offered by almost all major commercial banks as well as HBFCL (House Building Finance Company) which is an institution dedicated to providing home loans only. Banks offer different percentage financing for different purposes; the maximum is 75% of property’s value if the loan is required for constructing a house; this percentage is lower for renovation. However, the problem lies in the fact that this facility is not easily accessible by self-employed people or the ones belonging to lower income groups, hence creating a housing crisis. Banks tend to play safe when it comes to lending funds; they target the salaried class as the default risk is lower in this case. The lack of enforcement of foreclosure laws also makes the banks hesitant to offer mortgage to lower income bracket.
Home Loans are offered to both salaried individuals and business owners ranging from PKR 300,000 to PKR-50 Million, up to Maximum 85% (this can vary from case to case and bank to bank) of Home Value with a tenure ranging for 3 years to 30 years.
Islamic Banks in Pakistan also offer this facility. They use one of two models: Diminishing Musharka or Ijarah. In Diminishing Musharka, the bank becomes the co-owner of your home and you eventually buy out the bank over a period. In Ijarah the bank buys the home for you and you pay the bank back over a period.
The principle differences between Islamic and conventional housing finance is that the former is equity based and the latter is debt based. In an Islamic mortgage situation both the bank and the client share ownership [equity] and therefore share the risk of equity ownership. In conventional banking, the client owns all the equity and the banks loan to the client is secured on the value of the property.
The house finance market in Pakistan is less than one percent of gross domestic product (GDP) making it one of the least developed in the world. Add to the fact that there is a shortfall of nine million housing units with 600,000 additional units required each year you start to understand that this should be a Government lead priority. The issue is multifaceted: lack of an efficient institutional framework, high transaction costs, chaotic real estate sector, inadequate long-term funding arrangements and no secondary mortgage market.
Bank Requirements
The factors generally considered by banks before granting a home loan are as follows:
1. Income: You as the borrower must prove your ability to repay the loan for which you’ll need to submit documents regarding income, current assets, liabilities, education and experience etc. For the businessmen, banks will analyse the financial statements to see how the business has been faring for the past 2-3 years
2. Debt Burden Ratio: Your eligibility is calculated by applying Debt Burden Ratio (DBR) this is typically restricted to 50% of your monthly income. That means, that you need around 45- 50% of your income for personal expenses. All fixed obligations including the home loan applied for are restricted to a maximum 50% of your gross monthly income.
3. Credit History: Banks consider your credit history such as existing loan repayments, mishandled accounts or delinquent credit cards. This is checked through a database of past loans and repayments available with the State Bank of Pakistan and private databases.
4. Loan to Value (LTV) Ratio: is also a factor in eligibility calculation. Banks finance up to 70-80% of the property value as evaluated by the bank’s evaluator. For those who have not yet decided on the property, there is an option to sanction an in-principle amount, which helps to know the amount a bank would be able to give out.
Market Share
HBFCL remains the largest shareholder in the house financing sector. However, based on category, Islamic banks remain the largest players with 38 percent share in gross outstanding. Overall Islamic and private banks are major contributors to gross outstanding of housing finance. The share of private banks and Islamic banks (IBs) in the gross outstanding stood at 30 percent and 38 percent, respectively, as on June 30, 2017. Fourteen Islamic banking divisions (IBDs) and five IBs have 12 percent and 88 percent share, respectively, in housing finance portfolio of the Islamic banking industry. There is also a thriving micro-finance industry that is well poised to provide loans for staggered construction or home renovation. But the true potential of this industry is yet to be fully tested.
Consumer Reservations
Culturally, Pakistan is a collectivist society and as the youngsters can’t afford to build own houses they must stay in a joint family system. People are also very apprehensive in putting up the property as collateral as they think they would lose everything if they default. This is the reason they prefer renting houses or apartments rather than building their own; which in turn contributes to lower construction rate of housing units. Another reason is the distrust on the banking system and fear of indulging in haram activity by paying interest on the loan. Banks have introduced Islamic mortgage financing like Standard Chartered’s Sadiq Home Finance Scheme to tackle this issue. Furthermore, the interest rates charged by banks cannot be afforded by lower income individuals.
World Bank’s Initiative
World Bank has been developing a house financing plan for Pakistan to help deal with the housing shortage crisis. WB along with PMRC (Pakistan Mortgage Refinancing Company) are going to help in development of the mortgage sector, focusing mainly on the lower income brackets. The World Bank will be providing funds to banks through PMRC to increase the lending volume, specifically to lower income group. The target is to help expand the housing finance sector in such a way that it is profitable for the banks but also easily accessible than conventional loans. On-lending support is another way the World Bank plans to help banks increase their lending power; banks will be able to lend the money they have borrowed from other organizations/people.
United Bank Limited
United Bank Limited (UBL) is one of Pakistan’s largest banks in the private sector. The bank operates a network of over 45,000 customer touch-points which include 1,390+ branches across Pakistan and 19 branches overseas. It was declared Pakistan’s ‘Best Bank for Corporate Finance & Capital Market Development’ at the Pakistan Banking Awards 2017. The Bank’s entity ratings are AAA/A-1+. The Bank maintains its leadership in branchless banking through UBL Omni which has an agent network of over 42,100 outlets. The network also boasts 1120 ATMs and 480+ Contact Centre Agents across Pakistan. With a customer base of over 4 million, it leads the banking and financial services sector in Pakistan. Customers across the world have 24/7 access to the bank via UBL’s world class Internet Banking.
Vision
To be a world class bank dedicated to excellence, and to surpass the highest expectations of our customers and all other stakeholders
Mission
- Be the undisputed leader in financial services for our customers
- Most innovative and fastest growing bank in targeted businesses
- Continue to diversify across chosen geographies
- Achieve operational excellence with the highest level of compliance
- Consistently create leaders through inspired human capital
- Contribute positively to the communities we operate in
Values
- Customer first
- Honesty of purpose
- Teamwork
- Excellence
- Meritocracy
UBL Home Financing – UBL Address
UBL Address empowers you to become the proud owner of a home by offering a variety of product and pricing options that are flexible yet affordable.
They offer four home loan facilities:
1. Buying a Home – UBL offers loans to consumers that wish to buy a home. With a maximum financing limit of 70% one can easily buy a house or apartment. UBL Address offers easy and affordable instalments.
2. Building a Home – For customers that want to construct their own homes, rather than buying one, UBL Address offers different packages.
3. Home Renovation – UBL offers financing of up to PKR 10 million to consumers that wish to simply redesign or renovate their existing homes.
4. Balance Transfer Facility – UBL enables customers to transfer their current home loan that they have taken from other Banks and Developmental Financial Institutions (DFIs) to UBL and save money.
Eligibility Criteria
Borrower must be a resident of Pakistan aged between 23 to 65. The borrower may either be self-employed, businessman/professional or a salaried individual. In each case, the borrower must have a minimum monthly income of PKR 50,000. The minimum loan size is PKR 1,000,000.
Application Processing Time
Loan application processing time required from the time you give in your application to the time you are finally handed over your loan amount, is around 20 days, provided all the required documents are in order.
Documents Required
UBL requires the following documents from all applicants.
- A copy Of NIC Two recent
- Photographs each of primary as well as co-borrowers
- Signed Lou (Letter of Understanding), which states the applicable rate at the time of booking of loan.
- Other Documents are required to substantiate the length of business General Income Documents for Salaried and SEB/SEP are given below.
Title Assurance
To check the authenticity of the property title documents, clear legal Opinion is solicited from Bank’s solicitor, pre- and post-disbursement legal requisites and charge a very minimum cost that must be borne by the applicant.
Mark-Up Rates
UBL uses floating rates while determining cost of a loan. The floating rate is subject to annual revision from the time of loan booking. Mark-up rates are calculated based on the prevailing one-year Karachi Inter-Bank Offered Rate (KIBOR) which is taken as the base rate. A margin that varies from one pricing option to another is charged over and above the base rate, the details of which are as follows:
- Salaried KIBOR + 3.5% = Applicable Mark-up Rate
- SEB/SEP KIBOR + 4.5% = Applicable Mark-up Rate
Any change in the mark-up is linked to KIBOR hence there could be an upward or downward revision (if required) after every twelve (12) months from the date of the loan booking.
The applicable mark-up rate will be the rate prevailing at the month of booking.
Additional Charges and Penalties that a borrower may incur are listed in the table below.
Type of Penalty & Charges Amount/ Percentage
Late Fees (per instalment) PKR 1200
Appraisal Charges PKR 4,000 (Non-refundable)
Legal Charges PKR 4000 (or actual)
Life Insurance Optional
Processing Charges PKR 7500 (Non-refundable)
Prepayment penalties 8% in the first year, 5% in the second year and 3% in the third year onwards, on additional partial payment amount
Throughout the market, Property Insurance is mandatory for Home Loan Products. All other banks charge insurance fee from the customers, however with UBL Address, customers avail this free of cost.
Maturity Period
The maturity period for loans can range between 3 to 20 years depending upon the time of loan. The minimum property value must be PKR 1 million. The loan facility is only available for residential properties.
Loan to Value Ratio
The housing finance shall be provided at a maximum Loan to Value ratio of 85:15.
Prepayment Charges
Partial payments are payments over and above a customer’s monthly instalment. If a customer wishes to make repayments in addition to his/her monthly instalment, we allow the customer to make it once a year.
A customer cannot divide his/her Partial Payment of 6 monthly instalments into numerous instalments. The “No Penalty” option is applicable only on his/her first partial payment of any amount between the range of PKR 50,000 and 6 monthly instalments. If a customer decides to partially payoff any amount that is more than his/her 6 monthly instalments, he/she will be charged a penalty of 8% in the first year of the loan booking date, 5% in the second year and 3% in the third year onwards, on his/her additional partial payment amount. If the customer wants to make more than one partial payment of any amount in a 12-month period then customer will be charged a penalty of 8% in the first year of the loan booking date, 5% in the second year and 3% in the third year onwards, on his/her full/ 2nd subsequent partial payment.
Rescheduling/Restructuring of Loans
Loans will not be restructured more than once within two years. Tenure of the financing may be changed by maximum two years beyond the original tenure agreed with the customer subject to maximum financing tenure of 25 years.
Provisions already held against non-performing financing, to be rescheduled/restructured, will only be reversed if condition of 10% recovery or six instalments is met.
Default
Reaching 180 days past due date will be considered as default. If the borrower defaults again within two years after restricting of loan, the financing shall be classified under the same category in which it was prior to rescheduling/restructuring.
Limitations
Currently, properties offered for mortgage must be in a targeted area in either Karachi, Lahore, Islamabad, Rawalpindi or Faisalabad. UBL Address is no available in other locations of Pakistan which is a major drawback.
Conclusion
The incredible growth of Pakistan’s real estate market is even more astounding when you realize that it was all done in cash and the country still has little or no concept of mortgage financing. If you compare this to India who now has a healthy mortgage market valued at 10 percent of their economy you can see that Pakistan is lagging greatly.
The market for home loans is picking up fast. The onus is on the government to introduce reforms and new legislation to make it easier to get a first-time home loan, and the entire process should be streamlined. Our legal system should support the industry, particularly in timely action against defaulters. The House Building Finance Corporation (HBFC) has almost become bankrupt owing to very low recovery of disbursed loans. Such matters greatly hamper growth of the industry and must be countered immediately.