KSA Bankerฎ replied on Wednesday, October 24, 2018 02:21 PM
I fully agree with the point mentioned by thinker regarding anomaly between prevailing interest rates and rental yield on property for the non-existence of mortgage financing in Pakistan. It does not matter whether you are buying for your own use or to rent out, economic considerations are all the same.
Being from banking background, I through of illustrating the point with an example:
In the west โ say in Canada (numbers for illustration):
โ Price of a house โ $555,555
o 10% paid with buyerโs cash (equity) โ $55,555
o Paid with mortgage loan - $500,000
โ Annual interest rate on mortgage โ 2.0%
โ Loan repayment period โ 25 years or 300 months
โ Monthly principal repayment - $1,667
โ Since outstanding amount goes down uniformly from $500,000 to $0 in 25 years, so average amount outstanding during this period is - $250,000
โ Hence, average monthly interest expense - $417
โ Hence total monthly debt service - $2,083 (i.e. $1,667 + $417)
Now imagine instead of buying the house, the person is renting it then:
โ House value - $555,555
โ Rental yield โ 4.5%
โ Monthly rent (excluding any inflation) โ 2,083
So in light of the above, as long as the person has savings of $55,555 to make the 10% down payment, he/she would opt for buying the house on mortgage because monthly rent and mortgage payment would be same but in first case, he would own the house after 25 years and in the second case, he would not.
In the Pakistan โ say in Lahore (numbers for illustration):
โ Price of a house (DHA Phase 6, 1K) โ PKR 45,000,000
o 10% paid with buyerโs cash (equity) โ PKR 4,500,000
o Paid with mortgage loan โ PKR 40,500,000
โ Annual interest rate on mortgage โ 12.0%
โ Loan repayment period โ 25 years or 300 months
โ Monthly principal repayment โ PKR 135,000
โ Average amount outstanding during this period is โ PKR 20,250,000
โ Hence, average monthly interest expense โ PKR 202,500
โ Hence total monthly debt service โ PKR 337,500
Now imagine instead of buying the house, the person is rent it then:
โ House value โ PKR 45,000,000
โ Rental yield โ 4.5%
โ Monthly rent (excluding any inflation) โ 168,750
As you can see, if the person has only PKR 168,750 available for debt repayment, then he cannot buy the house on mortgage in Pakistan and hence has to live on rent.
This is the point which the โThinkerโ was trying to make. Hope this helps |
