The answer is simple -- lack of home loans with a reasonable interest cost. No, 16% interest per year on a 15-year home loan is not reasonable. It is a rip off. It is the world's highest cost residential loan for the people of the poorest nation.

Residential loans are considered by the financial institutions as one of the safest long term investment (a loan is an investment for an institutional lender). A typical home loan is advanced against the first mortgage of the underlying real state which can be a whole building, a flat or a land parcel. The first mortgage gives the lender the priority claim over the mortgage property in the event of default. If the borrower defaults on the loan, the first mortgage lender can foreclose the mortgage property with court's permission and liquidate the property for repayment of the loan before any other claimant(s). Since the advance rate for a typical home loan in Dhaka city never exceeds 80% of the market/appraised value of the mortgage property, the lender always enjoys at least 20% more value to secure the loan. This cushion of safety keeps growing as the borrower pays down the principal on the loan. As such, the lender never faces risk exposure unless the market value of the mortgage property falls drastically during the term of the loan. The risk of default is also minimized if the mortgage property is the only residence of the owner or if the borrower is a first time homebuyer.

A person with a decent job and good credit standing who meets all the borrowing criteria set up by the lenders can get a loan for a flat/home only from couple of sources, and with an interest rate so high that he/she would have to pay back more than 2 ½ times of the original borrowed amount in 15 years. The same borrower can obtain the same amount of mortgage loan in New York but would not pay back more than 1 ½ times the principal, and in India, 1 7/8 times the principal. Due to the interest rate differential on a 15-year Tk15 lakh home loan as indicated in the table below, Bangladeshi flat-buyers would have to pay over Tk 10 lakh more only in interest payments than the buyers in India. Given the average annual income of US$460 in India and US$360 in Bangladesh (World Bank 2001), isn't it unfair that people of Bangladesh with lower income levels are paying much more for real properties than people of India at the end of the day? Due to lack of government regulations and under-developed financial markets, we are so helpless as borrowers of home loans that the home lenders are able to force us to swallow exorbitant interest loans regardless of the creditworthiness of the borrower and the value of the collateral.

Prevailing Mortgage Rates (15-20 Yr)

Bangladesh : 15-16 %
Sri Lanka : 12.5-13.5%
India : 9-10%
Thailand : 9-10%
USA/EU : 5-6%

Although mushroom-like banks are visible in big cities, the lending culture in Bangladesh is very non-dynamic and customer unfriendly. The banks lack skills to diversify their revenue sources with innovative financial products like securitization, mutual fund management, trading of balance sheet loans, personal financial planning and advice, derivative transactions etc. These products help banks to diversify revenue sources as well as risks.

When a borrower takes a 16% 15-year Tk15 lakh home loan with 1% going in fee, the lender is making 17.5% return (internal rate of return with 10% cost of capital) on the loan without taking significant risks. Any honest businessman knows how difficult it is to make 17.5% return in a competitive business environment. It is an unfair deal for a borrower to provide 17.5% return to the lender for a home loan used for buying residential flat/house where the borrower intends to dwell. It is also unfair to blame the lenders alone. Absence of proper guidance and monitoring by the government authorities, consumer groups and trade bodies are also responsible for this situation. It is very important for a borrower to be knowledgeable of the financial and legal consequences in case of default before signing the loan agreement with a lender. Unfortunately, besides somebody's relative who happens to be a bank officer, there is no such facility in Bangladesh where people can get honest and reliable guidance about home loans and mortgages. Banks, builders, realtors and trade bodies should come forward, for their own good, to educate home loan seekers about the responsibilities that come with when borrowing from a financial institution. Borrowers should be aware of the criteria used by the lender for determining interest rate on home loans. Shopping around and comparing the rates and fees charged by different lenders would help a loan seeker negotiate a better deal.

Residential real estate in cities like Dhaka and Chittagong has remarkable potential for growth. Like any other country, lower interest on home loans can stimulate demand for residential real estate in our country as well. With low interest financing, more people will be encouraged to buy the flat or house they only dreamt about before. The higher demand will also encourage the builders to construct more. Eventually, price for real estate will stabilize at a point where demand and supply balance. There are some preconditions for this scenario to work. Some of these conditions are - i) Bangladesh Bank must be able to stop the banks and financial institutions from acting as monopoly; ii) Home loan lenders must be able to recover their claim on a mortgage property in case of default with quick and minimum legal actions; iii) Mandatory title certification and insurance for easy and reliable transfer of property rights; iv) Bangladesh Bank must set up guidelines and policies for home loans and if they already exist, they need to be easily available to general people to understand; v) Applicable interest rate on a home loan must reflect borrower creditworthiness and collateral value.

When a bank loan works as a financial leverage rather than a financial burden for the borrower, the default risk is minimized and both the lender and the borrower receive economic benefits.