Working Paper 02
This paper reviews international literature analyzing various mortgage designs, followed by an overview of two options that may provide the optimum model of mortgages for low-cost units in Pakistan. A proposal for a low-cost housing finance scheme, in light of local characteristics, is then presented along with a framework for managing and measuring the scheme.
Instead of encouraging self-liquidating fixed rate mortgages for low-cost housing units (as recommended by the SBP policy), the government should provide outside equity in the form of shared equity mortgages (SEMs) to assist prospective buyers to become home owners. The joint equity in this proposed path forward will maximize initial down payment and thus reduce the amount to be financed by banks. This will limit the debt incidence for the borrower. Studies show that such mortgage structures increase affordability, and limit the losses of borrowers, as well as losses to the wider economy under recessionary conditions. Additionally, based on practices in developed mortgage markets, the amortization period of the mortgage should be doubled from 12.5 years to 25 years. The paper concludes with a discussion on implementation modalities and discussion points pertaining to the proposals presented.
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