In a country like Pakistan, where property prices rose sharply within the past five years and 55% of the population falls into the mid-income strata, mortgage still remains an unappreciated facility. According to State Bank of Pakistan’s report,the number of borrowers dropped by 3.9% from 70,368 to 67,625 last year. Conversely, it was up by 3.5% in the previous quarter, showing a ray of hope for mortgage in Pakistan.

Currently, 24 commercial banks, one microfinance bank & House Building Finance Company Ltd (an institution offering home loans only) are providing home finance to people. Being the pioneer for providing housing finance in Pakistan, HBFCL enjoys 24% of the total share among other companies providing the same services. During the quarter, 46.77% new mortgagors have been registered through HBFCL. The company provides average loans of about PKR 1.7 million, in contrast to loans provided by private banks of PKR 6.3 million and PKR 9.7 million by Islamic banks, according to the stats recorded between January 2016 and March 2016.

“Keeping in mind the current market conditions and economic crunch, banks are playing safe,” says Mr. Jahangir Talib, a banker. “They are lending more to salaried individuals rather than self-employed ones. As you can see, the total lending in housing sector during the last year comprised 60% salaried persons, which shows that banks are mainly focusing on salaried individuals. This is because the chances of defaults are less likely with salaried individuals compared to the self-employed folks,” he added.

Institutions providing home finance issued loans of PKR 5.35 billion to 1,055 people in the preceding quarter; 60% of the borrowers’ main source of income was salary. This shows that financial institutions focus more on high-salaried people with the security of their paying back loans.

Amidst all this, non-performing loans (NPL) have seen a dip of 10% in the previous year and 5% in the last quarter. On a better note, HBFCL’s NPL shrank 16% in the preceding quarter, because HBFCL and other financial institutions have curtailed loans for companies and contractors. Their main focus is on individuals seeking residential property for outright purchase.

Per a SBP report, gross finance in the quarter for the category of ‘Outright Purchase’ was 63% in comparison to construction and renovation, which were 24.9% and 11.5% respectively.The SBP report also stated that financial institutions are less interested in lending for land and property renovation and construction.

With house mortgage contributing only 0.5 percent in the GDP, Mr.Talib suggests that ‘mortgage option should be made available to lower-income bracket as well. It will not only reduce the housing shortfall, but contribute to the economy as well.’

Banks have the advantage of earning profits from house financing. ‘In case of default, banks confiscate the pledged property. Mortgage is a secured loan, as opposed to personal loan or credit cards which are totally unsecured. Hence, if someone skips the payment, the bank would still be able to recover its loss.’ Mr. Talib added.

‘Mortgage is not affordable for the common man as the interest rate is too hefty for a person like me to pay back’, said Mr Kamal Yousaf, the sole breadwinner for a family of seven. This is one of the reasons for the dip in mortgage borrowers. The interest rates are very high and the procedure is tiresome. “Long procedures, tight credit policies and minimum requirements to qualify for loans by financial institutions are getting tougher day by day”, Mr. Kamal added.

According to Zameen.com’s property price data, rates of residential plots have increased from 2,203 per square foot in January 2011 to 5,034 by July 2016. With more than doubled prices within 5 years, purchasing power of the low-income strata has decreased further. In such scenarios, facilities like mortgage must be made easier for the people and the procedures must be made a little simpler to help as many people own property as possible.