Mortgage Finance makes up a significant portion of the loans given out by banks in developed countries. In Pakistan, however, they remain unpopular primarily due to two main factors.
1) Interest Rates as high as 16 to 20% per anum makes the monthly repayment installments quite high (usually about four to six times the rental value of a property).
Another reason for the major dip in mortgage financing was the 2008 properly slump; investors have backed out of the market and the general public is reluctant to buy property in the hope of a further dip in prices.
To revive mortgage financing and bring some life to the real estate market, the following measures are suggested:
(i) The tenure for mortgage financing should be extended to 30 years (as it is in the U.S) so that monthly repayments are reduced to almost twice the staring rental value of the property. This can only happen if the State Bank and/or international institutions intervene in the market.
(ii) Early in 2010, the State Bank Of Pakistan suggested the formation of a company in collaboration with the International Finance Corporation (IFC), which would extend long-term loans with terms exceeding 15 years. The Government of Pakistan has agreed in principal offering to buy 20% equity in such a venture. Currently, commercial banks don't offer long term loans which limit the number of people willing to invest in the property market. If and when this company materializes it will increase the variety of mortgage products available in the market.
(iii) A national database for real estate documents with current titles )name of owner) should be put in place. This would help banks authenticate who the actual owner of a given property is and allow them o increase the number of areas for which they offer mortgages. Currently, most banks are willing to lend only in specific areas where there is a surety that title documents are authentic.
(iv) To facilitate low income buyers, the Government should enter into public-private partnerships with reputable developers and provide land at low cost.