SBP New Regulations for Housing Finance

The State Bank of Pakistan (SBP) has made amendments to its Prudential Regulations for Housing Finance. The amendments come as Pakistan continues to suffer from a huge shortfall for residential housing, with some estimates suggesting the shortfall is as large as 12 million. This has prompted the government to roll out a slew of measures to improve the situation, including improved access to housing financing. The latest update by the SBP appears to be the latest measure in this effort.

The most significant update in the regulations has been an improvement in the duration of the loans. As per the amendment (regulation HF-4), now loans for housing finance will be extended to 30 years. This has been a contentious issue for banks as they argue that most of the deposits made in banks are for short term i.e. less than 5 years, which makes it difficult for them to extend bank loans beyond that duration. The same regulation also extended loans for renewable energy financing to 10 years.

Furthermore, the amendments (regulation HF-5) have mandated that the Loan-to-Value ratio for loans pertaining to housing finance shall be 90:10, meaning that in order to avail a loan for housing finance, an applicant needs to put down only 10% of the total value of the house financing project as down payment, while the remaining 90% will be provided in the form of loans by banks.

Furthermore, according to regulation HF-6 also referred to as Debt-Burden Ratio, a potential borrower needs to ensure that the monthly amortized payment for the loan (i.e. the amount the borrower will pay to the bank each month for the duration of the loan) cannot exceed 65% of the borrower’s total monthly income, comprising the housing finance under consideration and all other outstanding consumer-financing obligations. This means that a borrower’s total financial obligations for formal debts, including the housing loan’s payments, cannot exceed 65% of their total income.

Banks and DFIs (Depository Financial Institutions) were instructed to make use of proxy models for informal-income estimation provided by the Pakistan Banking Association (PBA) to determine a potential borrower’s repayment capacity if formal data is unavailable.

The amendments also laid out exactly what will qualify as housing finance (regulation HF-1):

1. Purchase of a house or apartment
2. Construction of a house on a plot already owned by the borrower
3. Purchase of a plot and construction of a house thereon
4. Extension or expansion of an existing house
5. Renovation of a housing unit
6. Installation of renewable-energy solutions in housing units

This formally added the installation of green energy solutions to houses as part of housing finance.