This is how you can become a homeowner in Pakistan

Breaking down the government's mark-up subsidy on mortgages

I have generally advised against chunky real-estate exposures due to high concentration risk (most of your capital is stuck in one transaction), and liquidity risk (it is difficult to sell, or cash out of real estate quickly).

However, if the math works out, then there is no reason not to dabble in real estate.

Sit back, grab a coffee, and read carefully. This may influence you to take a step towards becoming a homeowner without taking excessive risk. And yea, subscribe, if you haven’t already

Setting the context

Unless you had generational capital or a house that your parents or grandparents built, chances are you’re paying rent, and have pretty much figured that it’s impossible to get someplace of your own. The housing mortgage market in Pakistan is pretty thin, with double-digit interest rates (making owning a house very expensive), and the reluctance of financial institutions to lend for mortgages.

The government in its n-th attempt to catalyze growth has come up with an ambitious plan to support overall construction, and real estate activity. One of the tools that the government is using is providing ‘mark-up subsidies’ on mortgages up to a certain limit, for first-time homeowners. This is where the mid-to-high income and asset-poor non-boomer (with little or no generational capital) crowd fits in.

So what’s the scheme?

The scheme is simple. You find a place for yourself. See where you fall within the tiers detailed below, figure out how much mark-up you need to pay, and monthly installments, and you’re done. The only catch here is that there is a ‘maximum covered area’ and ‘maximum loan limit’, which is justifiable to avoid lending for luxury housing. Within the parameters of the scheme, you can easily get a 2-bed apartment in pretty much any area of the country (with the exception of super-luxury units).

The real sweetener here is the discounted pricing. You can get a loan, and pay between 5-7% in mark-up for the first five years through the subsidy scheme. Without the subsidy, the mark-up would be around 9.5%+ — which means that if you fall within Tier 0 or Tier 2, you can get a discount of 48% on the mark-up. This is a sweet deal. Yes, from the sixth year onwards the mark-up increases slightly — but it is to be noted here that the bulk of payments during the first five years are in the form of mark-up. It is better to get rid of bulk payments at a lower than market rate.

The government has a scheme that actually works to your benefit, there is no reason not to use it.

But how do I make the downpayment?

Before you can get a loan, you need to arrange for a downpayment as well. This is the bulk payment that you make at the start of the loan. A downpayment in the range of 20% of the value of the property is a good place to start. Let’s say you identify a property valued at PKR 6 million, so you would need to make a downpayment of PKR 1.2 million. You can tap into your savings for this.

If you have been working for a few years, there is a high chance that you have a provident fund with your employer — you can withdraw that and make the downpayment. Relevant regulations allow you to withdraw funds from a provident fund to buy a house, etc.

Do I get any tax benefits?

Yes, you do get a sweet tax benefit as well, which reduces your overall monthly installment and improves overall cash flow. Simply put, the tax credit is calculated as follows:

Illustrative example

Let’s say you find a property valued at PKR 7 million, and you may a downpayment of PKR 2 million — the loan would be PKR 5 million, and put you in Tier 2, which has a mark-up rate of 5% for the first five years. Let’s also assume that we did a mortgage for 10 years.

Your monthly installment in such a case would be PKR 53,033, and you would roughly get a tax credit of PKR 2009 (assuming an effective tax rate of 10%), resulting in a net installment of PKR 51,024. You would think that’s a tad bit too much — maybe yes. But let us look at the opportunity cost now.

If you don’t own a place, or don’t live in your parent’s place, you are most likely paying rent, which for a similar property would be an easy PKR 24,500. This is the cash that is simply going out, without creating any capital ownership for yourself. This is the opportunity cost. Alternatively, if you already live in a place where you don’t pay rent (do thank your parents or grandparents for that), you can still buy the property and rent it out — becoming a rent-seeker in the process.

If you deduct the opportunity cost of rent from the monthly installment, suddenly the ‘net cash outflow’ is a more palatable PKR 26,500. This is it — for an extra PKR 26,500, you can own your own home, and avoid put that rent towards creating equity for yourself.

The table below summarizes it all neatly.

In this piece, I have set the ground rules, and the potential opportunities that exist, which can be levered by using the government scheme. I will be publishing a mortgage calculator soon so that you can tweak and figure out whatever works for you. Even if the scheme does not allow you to buy your dream home (whatever that is), it at least enables you to take a step in that direction.

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