
Home Financing Process: A Modern Approach in Pakistan
July 03, 2023
Home
Financing Process: A Modern Approach in Pakistan
Buying
a home is a crucial step towards achieving financial stability and personal
happiness. Individuals, particularly those from lower- and middle-income
brackets, who aspire to own a property in Pakistan have encountered obstacles
due to the rising cost of construction and inflation. The home financing
process in Pakistan has evolved to accommodate a variety of requirements and
preferences. It is estimated that a sizeable portion of the population,
particularly those from low-income groups, faces difficulties acquiring
property due to financial constraints and restricted access to formal financing
options.
According
to a research, more than
one-third of Pakistan's total population of 229 million people reside in
approximately 20, 01 million urban houses, while the remainder reside in
approximately 13 million rural houses. However, there is a significant housing
shortage in Pakistan, estimated at 10 million housing units, with more than
half of them located in urban areas. By 2025, it is anticipated that this
shortage will increase to approximately 17.2 million units.
Obtaining
loans for the purchase of real estate can be challenging for numerous reasons.
One of the most important factors is the interest rate levied by banks.
Interest rate is 21% in Pakistan.
Hence, people may find it difficult to afford the monthly payments and qualify
for the desired loan amount when interest rates are higher.
In
addition, banks have specific criteria and requirements that loan applicants
must satisfy. Typical eligibility requirements include a stable source of
income, a solid credit history, a certain debt-to-income ratio, and a minimum
down payment. Banks evaluate these factors to mitigate risk and ensure that
borrowers have the means to repay loans.
Also,
banks conduct exhaustive evaluations and due diligence procedures to determine
the creditworthiness of prospective loan applicants. To determine the
applicant's capacity to repay the loan, they review documents such as income
statements, tax returns, and employment records. By guaranteeing responsible
lending practices, this evaluation procedure seeks to protect both the bank and
the borrower.
It
is essential to note that while banks have criteria and interest rates, they
also play a crucial role in facilitating the acquisition of property by
individuals through home financing options.
According
to State Bank of Pakistan, a borrower pays an annual fixed rate of 3%
for the first five years. After that, the rate increases by 5% annually for the
next five years. Then, for the remainder of the term, the rate is based on
KIBOR plus an additional percentage of up to 250 basis points (or 2.5%).
There
are two contemporary approaches to mortgage financing, including conventional
bank loans, and Islamic financing. Understanding these options will enable you
to make well-informed decisions as you embark on the path to homeownership.
Conventional
Bank Loans
In
Pakistan, conventional bank loans have been a popular alternative for home
financing for a long time. These loans are provided by commercial institutions
in accordance with the standard interest-based banking system. Generally, the
following stages are involved:
- Begin by submitting a loan
application to the bank of your choice, along with the required documents,
such as evidence of identity, proof of income, and property-related
information.
- The bank evaluates your credit worthiness,
taking into account variables such as your income stability, credit
history, and debt-to-income ratio. This evaluation establishes your loan
eligibility and the applicable interest rate.
- A down payment, typically a
percentage of the property's value, will be required. The exact sum varies
based on the bank's lending policies and the loan-to-value ratio.
- Once your loan application has
been approved, the bank transfers the agreed-upon loan amount to the
vendor or developer. Then you can finalize the purchase transaction.
Islamic
Finance
Islamic
financing, also referred to as Sharia-compliant financing, is gaining
popularity among those seeking a modern and ethical approach to property
financing. It follows the principles of Islamic law, which prohibit the payment
or reception of interest (riba). How Islamic financing functions is as follows:
- Instead of charging interest,
Islamic institutions use alternative structures such as Murabaha (cost-plus
financing) or Diminishing Musharaka (partnership financing).
ü In a Murabaha
transaction, the bank purchases the property and sells it to you for a higher
price, payable in installments.
ü In Diminishing
Musharaka, the bank and the buyer form a partnership, with the bank
progressively transferring its share to the buyer until complete ownership is
attained.
- The procedure for applying for
Islamic financing is similar to that for conventional bank loans,
requiring the submission of the necessary documents and information.
- Islamic institutions evaluate
your financial standing to determine your eligibility for credit. They
concentrate on evaluating your ability to pay installments and the
viability of the proposed transaction.
- Once the financing has been
approved, the bank disburses the funds to the seller, and you become the
property's proprietor. You will then begin repaying the loan amount in
accordance with the terms of the agreement.
In
the modern era, technology has transformed the home financing process, making
it more accessible and efficient. Banks and other financial institutions now
offer online application systems, allowing you to register for financing
without leaving your home. Many banks also provide digital tools and
calculators to help you determine your affordability and compare various
financing options.
In
addition, technology has facilitated the documentation procedure. Submitting
and verifying documents electronically saves time and reduces documentation. Digital
platforms provide access to real-time updates regarding the status of your
application, ensuring transparency and convenience throughout the entire
process.
The
landscape of home financing in Pakistan has evolved to provide a variety of
options that appeal to individuals' needs and beliefs. Whether you choose a
conventional bank loan, Islamic financing, or government-sponsored programs, it
is essential to comprehend the process to ensure a smooth homeownership
journey. Adopting technology improves the experience by streamlining application
procedures and fostering transparency. By adopting this modern approach to home
financing in Pakistan, you can pave the way to realizing your desire for home
ownership.
For details, Dial 03-222-111-026,
03-111-111-026, or 042-111-111-026.