Buying a home on mortgage is quite easy in the western developed countries, such as the USA, Canada and the UK. These countries have a massive home buying, mortgaging and refinancing infrastructure that has been digitized for the customers’ benefit. The land records and income verification processes are also quite easy to complete.
If that wasn’t enough, the interest rates in the west have been remarkably low in the past decade. Ever since the financial crisis of 2007-2008, the US FED rate has been around 1 to 4 percent. This makes the cost of borrowing very cheap for home loan.
Home Buying in Pakistan
Compared to the west, buying a home on mortgage is like a nightmare in Pakistan. There are several reasons for that.
The home mortgage industry is very under-developed in the country. Buyers have few options for loan origination and home refinancing. Banks and lending institutions also do not have a good way to check for credit score and repayment history of consumers.
Another major hurdle is the negative connotation surrounding interest-based mortgage lending itself. Many people in the country do not use a bank due to religious beliefs. Still if we move past that hurdle, the massive interest rate is a big obstacle for people to consider mortgages.
Unlike the developed countries in the west, the interest rate in Pakistan has been very high for the last two decades. The high cost of borrowing turns a lot of people away from the idea of investing in their home.
Mera Pakistan Mera Ghar
Mera Pakistan Mera Ghar (or MPMG for short) was launched by the State Bank of Pakistan under directions from the incumbent PTI government of Pakistan. The program was launched to offer affordable housing finance for the public, which was one of the major election promises of the ruling party.
Under this program, the government of Pakistan will be subsidizing certain registered banks for extending home finance to the public. The payment rate for consumers has been fixed at 3%, 5% and 7% (depending on the product category) for the initial years of the tenor. Here’s how it works.
Approved banks create home loans at the markup rate of KIBOR plus bank spread for each customer.
Customers are only required to pay their relevant rate. For example, someone qualifying for Tier 2 at 5% markup price on the mortgage will only need to pay the 5% rate.
The State Bank of Pakistan will reimburse the lending bank for the amount difference between their lending rate and fixed markup rate for the borrower.
At the time of this writing, KIBOR is trailing at just under 12%. With a bank spread of 4%, the actual rate of financing can go up to 16% for consumers. This is not a very practical route for borrowers on a long-term, 20-year loan.
A fixed rate of 5% for the initial years of the mortgage make MPMG a very attractive and useful home financing product for consumers. This is expected to bring costs down significantly for new home buyers, making it an affordable option for most people.
On the surface, there are not a lot of limiting factors about MPMG. The State Bank announced that all Pakistanis with valid CNICs and NICOPs are eligible to apply for the scheme. The only limitations are that the borrower must be a first-time home buyer and consumers can only avail financing through this program once.
Here’s a quick overview of the eligibility criteria, from SBP website.
Some banks have added certain additional qualification criteria to minimize their risk. For example, people under the age of 23 and over the age of 55 might find it difficult to qualify for financing through MPMG as banks see them as more risky clients.
One of the major limiting factors for the public is the maximum financing amount under MPMG. The maximum finance you can get is PKR 10 million under Tier 3. With Tier 2, this amount is limited to PKR 6 million.
As home prices in cities like Karachi and Lahore are going well over 10 million, borrowers may find it difficult to get the full necessary funding with this option.
Furthermore, the maximum monthly installment you can dedicate for repayment is up to 45% of your monthly income. For example, if your total monthly income is PKR 1 Lac, you can only dedicate PKR 45,000 to repayment each month.
If we look at the rates and data published by SBP, that means you can qualify for maximum financing of PKR 6 million over a 20-year tenor, with a monthly income of PKR 1 lac.
What if your monthly income is PKR 50,000? The maximum financing you can get in this case is around PKR 3.4 million.
It is obvious from these calculations that your maximum financing qualification is dependent on your monthly income. The more you earn, the higher maximum loan you can qualify for.
Income Clubbing with Co-Borrowers
One great thing about MPMG is that it allows you to add up to 4 co-borrowers on the application. You can use the income from these individuals and club it together to raise your maximum allowed financing amount.
For example, suppose you earn PKR 50,000 each month. You have two brothers, and both earn PKR 30,000 each.
All three of you are looking to purchase a home that is PKR 7,500,000. You can pay PKR 1,500,000 as down payment and want to get the rest of the amount, i.e. PKR 6,000,000 from the bank.
Normally, you wouldn’t be able to qualify for this loan. However, if you add your brothers to the application as co-borrowers and provide proof of their monthly earnings, the three of you could be qualified to get approved for a PKR 6 million loan, together.
The Future of Mera Pakistan Mera Ghar
With record high levels of inflation in the country, the interest rates are not expected to come down any time soon. In December 2021, the government raised the federal interest rate by 100 bps, taking it to 9.75%.
As most banking companies add 2.5% to 4% bps to the rate, it has become quite expensive for borrowers to apply and qualify for home loans through regular home financing means.
Meanwhile, the MPMG rate is fixed at 5% and not expected to go up. Clearly, this makes it a very affordable and useful product for consumers.
If you have more questions about Mera Pakistan Mera Ghar, or want to apply for your home loan, then please get in touch with our client representative. Call 0309 2228435 or email us at email@example.com with your contact details to get a call back.