Stable Interest Rate Will Stimulate Property Market
KARACHI: The benchmark interest rate in Pakistan remained fixed at 5.75 percent in January 2017. The State Bank of Pakistan (SBP) decided for the fourth consecutive time to leave the rate unchanged in a bid to keep economic growth alive in a stagnating inflationary environment.
So how will this affect homeowners?
The mortgage market is still in its infancy in Pakistan that is despite the SBP setting up a dedicated infrastructure and housing finance department to provide support to the home loan financing market. Those that have been lucky enough to get home loans are at the mercy of fluctuations in interest rates.
“The home loan market desperately needs new reforms,” said Saad Arshed—managing director of Lamudi—the global property platform. “Making home loans more accessible to a wider market will be a much needed boost to the property market.”
The stability in interest rates will eventually build confidence in the market giving large financial institutions like Standard Chartered Bank more of a reason to offer better terms and rates. The lending rate has a big impact on the property market. If the rate goes up the gap between the criteria set out by the financial institutions and homebuyer’s ability to secure these conditions increases. A higher rate results in higher bond repayments or having to opt for a lower bond amount.
This creates a situation as we can see in Pakistan where most low-income earners cannot purchase a property—and the estimated 12 million housing shortfall continues to grow.
The bank base their decision on whether to issue a new loan based on the prime lending rates. If the rate goes up the buyer’s ability to repay the loan reduces. It is not only new homeowners that are affected by lending rates, current homeowners are also impacted. If the rate stays the same and the homeowner’s income increases they can pay additional funds into their loan accounts to reduce the term time.