SBP allows banks to accept third party guarantee for house financing

• SBP has allowed banks to accept a personal guarantee of a third party for low-cost house financing.
• The guarantee will remain valid for a maximum period of one year.
• The SBP issued five regulatory relaxations to incentivise banks to promote low-cost housing finance in the country. 

KARACHI: With an aim to facilitate the banks in extending low-cost housing finance, the State Bank of Pakistan (SBP) has allowed banks to accept a personal guarantee of a third party for low-cost house financing to cover mortgage risks, The News reported on Tuesday.

According to the press release issued by the central bank, currently, applicants face difficulties in obtaining housing finance, especially for low-cost housing, “as banks fear 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,” read the statement.

Therefore, the SBP has permitted banks to accept a personal guarantee of a 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 homeownership of potential borrowers wishing to avail housing finance under government markup subsidy scheme issued by State Bank of Pakistan on October 12, 2020,” the central bank said.

Regulatory relaxations to promote low-cost housing finance

The SBP issued five regulatory relaxations to incentivise banks to promote low-cost housing finance in the country. 

Read more: SBP says it did not direct banks to charge fee for balance inquiry through ATMs

With a markup subsidy facility by the government and regulatory incentives under low-cost housing finance, the banking industry can enjoy the benefits as the value of housing units has been increased from Rs3 million to Rs3.5 million and the maximum loan size from Rs2.7 million to Rs3.15 million.

Moreover, a third-party guarantee will cover the period from the disbursement of the 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 a keen interest in their 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.

Credit Guarantee Trust

Funded by the World Bank, a Credit Guarantee Trust, with PMRC as trustee, has been set up by the government with the support of SBP and will provide risk coverage of up to 40% to primary mortgage financiers on first loss basis. 

Keeping in view the dynamics of the mortgage market and to facilitate market growth, the scheme has been designed for both conventional and Islamic banks.