SBP Issues Guidelines To Promote Housing Finance In

KARACHI: The State Bank of Pakistan on Thursday issued guidelines for banks and development finance institutions (DFIs) that allow them to extend loans for the under-construction projects, in a bid to facilitate buyers in obtaining housing finance.

Currently, banks are reluctant to provide such financing which limits the options of home buyers that need financing to completed units.

The SBP’s new guidelines provide a complete framework with necessary risk mitigation elements for the banking industry to support this area of housing financing.

Essentially, the financing risk of banks will be secured through the mortgage of project land based on specific arrangements with builders. The payments to builders will be routed through a specially created account (known as an escrow account) with no direct access to the seller until completion of construction milestones as agreed between financing banks and builders.

The purchasers of housing units availing housing finance will be able to enjoy a number of benefits. The purchasers will get the housing units in under-construction projects which are relatively low cost compared to fully constructed units.

The strong monitoring and oversight by the banks will facilitate timely completion and transfer of possession to the purchasers. Housing units are new; the purchasers may bear lower maintenance and renovation costs for the initial few years.

These benefits are expected to create incentives for buying under-construction houses thereby creating demand for the construction industry.

Banks are reluctant to offer finance for the purchase of housing units in under-construction projects, as compared to completed projects. The prevalent market practice is that builders allow the purchasers of housing units to make periodic payments when construction begins against allotment letters which is a convenient process in enabling homeownership.