Banks allowed third party guarantee for house financing

KARACHI: The central bank on Monday allowed banks to accept personal guarantee of third party for low-cost house financing to cover mortgage risks.

The State Bank of Pakistan (SBP) said currently applicants face difficulties in obtaining housing finance, especially for low cost housing, “as banks are reluctant to take the risk of the house not being completed or documentation completion”.

“The completion of housing unit and mortgage creation takes time. In order to address this issue for applicants and banks, the SBP has allowed acceptance of a third party guarantee for this period up to a maximum of one year,” the SBP said in a statement/

With the aim to facilitate the banks in extending low cost housing finance, SBP has allowed them to accept personal guarantee of third party until the housing unit is completed and the mortgage is perfected. The guarantee will remain valid for a maximum period of one year.

“This step will help promote home ownership of potential borrowers wishing to avail housing finance under government markup subsidy scheme issued by State Bank of Pakistan on October 12, 2020,” the SBP said.

The SBP issued five regulatory relaxations to incentivise banks to promote low-cost housing finance in the country. Banking industry can enjoy markup subsidy facility by the government and regulatory incentives under low-cost housing finance. The value of housing unit has been increased from Rs3 million to Rs3.5 million and maximum loan size from Rs2.7 million to Rs3.15 million.

Third party guarantee will cover the period from the disbursement of loan to the time when construction is completed and risk coverage becomes available by Pakistan Mortgage Refinance Company (PMRC). Acceptance of third party personal guarantee will provide additional comfort to banks for extending low cost housing finance, an area in which banks have keen interest for its business potential.

“It is expected that with this move, banks will increase their efforts to ensure that the benefits of the markup subsidy scheme reach marginalized segments of the society who currently do not own a house,” the SBP said.

A Credit Guarantee Trust, with PMRC as trustee, has been set up by the government with the support of SBP and funded by the World Bank. The trust will provide risk coverage of up to 40 percent to primary mortgage financiers on first loss basis. The guarantee will partially alleviate the credit risk of primary mortgage financiers and provide a conducive environment for banks to finance housing for the low-income. Keeping in view the dynamics of mortgage market and to facilitate market growth, the scheme has been designed for both conventional and Islamic banks.