Tuesday, October 3, 2023

SBP will issue guidelines for financing housing units under construction

The central bank has decided to issue guidelines to encourage banks/development finance institutions (DFIs) to extend housing finance to units in projects under construction for which they have already entered into project finance agreements with builders/developers, according to a statement. issued on Thursday.

These guidelines for financing housing units in under-construction projects were developed by addressing issues of legally enforceable rights and responsibilities while taking into account current market norms of buying/selling housing units in under-construction projects.

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While the rules cover a wide range of topics, it stated that all payments to the builder/developer for the completion of the construction/project would be channelled through an escrow account held by the consortium’s bank/lead bank.

It further stated that the builder/equity developer’s and the purchasers’ equity contribution, as well as the purchasers’ subsequent payments via mortgage finance, would be routed via the same account.

As a result, the State Bank of Pakistan (SBP) has decided to exclude banks/DFIs providing housing financing for under-construction housing units from the criteria outlined in Regulation HF 8: Mortgage Creation for Housing Finance. This exemption will be available until the builder/developer and buyers of housing units have agreed on a completion certificate, NOCs, permissions, utility connections, and a registered title deed.

To qualify for this exemption, banks/DFIs must strictly adhere to the conditions of the rules for financing housing units in under-construction projects.

Across the country, builders/developers are creating and selling a variety of multistory home developments. Despite the fact that these under-construction projects are subject to project completion risk and builder/developer performance risk, many people are drawn to book housing units in these projects because to their affordability and the flexibility of making payments in instalments.

However, banks/DFIs have typically shied away from financing housing units in under-construction projects due to difficulties with the availability of legally enforceable title papers and mortgage registration in accordance with the Prudential Regulations for Housing Finance.

According to the statement, banks/DFIs provide project financing to builders/developers for the development of multistory housing complexes after appropriately insuring their project and builder risks through mortgages of project land and other assets.

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