KARACHI: The State Bank of Pakistan (SBP) has provided buyers with bank financing for housing under construction in order to generate growth in the construction and housing sector in line with government policies.

“To make it easier for buyers of residential units under construction to obtain housing finance, the central bank has issued guidelines to banks and DFIs that enable them to grant loans for projects under construction,” the SBP said on Thursday.

The SBP said banks are currently reluctant to provide such financing, limiting the options for homebuyers who need financing to complete units.

“The new SBP guidelines provide a complete framework with the necessary risk mitigation elements for the banking industry to support this area of ​​home finance,” she added.

The banks’ financing risk is essentially secured by mortgages on project sites on the basis of specific agreements with building owners.

“The payments to builders are routed through a specially set up account (a so-called escrow account) without direct access to the seller, until the construction milestones have been agreed between the financing banks and the builders,” said the SBP.

Housing buyers who seek funding will enjoy a number of benefits, the SBP said, adding that buyers will receive housing in projects under construction that are relatively inexpensive when compared to fully built units. The strong supervision and oversight by the banks will facilitate on-time completion and transfer of ownership to buyers while the units are new. Buyers can bear lower maintenance and renovation costs in the first few years.

“These benefits are intended to incentivize the purchase of homes under construction and thus create demand for the construction industry,” said the SBP.

Banks are reluctant to offer financing for the purchase of residential units in projects under construction versus completed projects. The prevailing market practice is for home builders to allow home buyers to make regular payments against allotment letters at the start of construction, which is a convenient process for making home ownership possible.

However, banks do not offer home construction finance against allotment letters. This deprives buyers of the opportunity to take advantage of housing finance from banks and thus to own affordable housing units in the construction phase of projects.

In addition, builders also complain that the unavailability of housing finance from banks for the projects under construction reduces demand and slows down the development of new projects. “Increasing funding after the publication of these guidelines will address such concerns,” said the SBP.

The SBP guidelines are an important step forward and are in line with the State Bank’s ongoing efforts to stimulate economic development by encouraging activities in the housing and construction sectors, she added.

“Home finance from banks is expected to see significant growth in the near future. In addition to providing borrowers with the ability to avail of Mera Pakistan Mera Ghar housing finance in sub-construction projects, it will also help builders increase the inventory of new homes across the country, “said the SBP.

Posted in Dawn, September 3, 2021