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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.