Home loan demand remains strong despite rising costs

Bangladesh's home loan sector is showing cautious resilience despite rising construction costs and soaring property prices that are squeezing middle-income homebuyers amid persistent inflationary pressures, according to Md Mahiul Islam, deputy managing director (DMD) of BRAC Bank.

"Despite these challenges, the sector's underlying fundamentals remain strong, as a decade of rapid urbanisation and industrial growth continues to fuel housing demand beyond short-term economic fluctuations," Mr Islam, who also heads the bank's Retail Banking division, told The Financial Express in an interview recently.

Commercial banks continue to dominate the market by leveraging their lower cost of funds to offer more competitive rates, the banker said, adding that this has intensified pressure on non-bank financial institutions, which are responding through innovative products, customised bundled offerings, and advisory services despite pricing constraints.

At the same time, the market is witnessing a gradual geographic shift, with lenders increasingly turning to secondary cities and peri-urban areas as Dhaka nears saturation and housing demand continues to grow beyond the capital, the DMD explained.

With construction and land costs rising alongside surging urban housing demand, the Bangladesh Bank's decision to raise the home loan ceiling from Tk 20 million to Tk 40 million comes at a timely juncture, according to the DMD.

He said the more significant move, however, is linking the loan ceiling to the non-performing loan (NPL) ratio, effectively rewarding banks with stronger credit discipline through greater lending capacity while constraining weaker performers -- a clear shift towards risk-based banking.

BRAC Bank closed 2025 with an NPL ratio below 2.5 per cent, reflecting sustained credit discipline and strengthening its capacity to serve the growing home loan market, the private banker said, adding that the central bank's latest move is expected to support long-term and secure investment in the banking sector.

On the key factors for home loan approval, the DMD said that while individual institutions may follow their own credit assessment frameworks, the core principles of prudent lending remain broadly consistent. At BRAC Bank, home loan evaluations are guided by three key pillars.

First, borrowers' repayment capacity is assessed through the debt burden ratio (DBR), based on net disposable income, ensuring total EMIs remain within a defined share of monthly income.

Second, strong credit discipline is required, including a clean Credit Information Bureau (CIB) report from Bangladesh Bank and a consistent repayment track record.

Finally, the underlying asset is rigorously evaluated, with properties required to have clear, marketable titles and undergo full legal due diligence and technical valuation, along with compliance with RAJUK or other relevant authorities.

On the main benefits and risks of home loans from both customers' and banks' perspectives, Mr Islam said a home loan is a long-term commitment where both opportunities and risks are significant, and both sides of the transaction carry equal importance.

For customers, the primary benefit is access to home ownership without requiring a large upfront payment, allowing families to acquire property and repay in manageable instalments while building an asset over time, with potential tax advantages depending on the structure.

However, the risks are also significant, as job losses, medical emergencies, or income shocks can quickly turn manageable EMIs into a financial burden, the DMD added.

For banks, home loans are among the most attractive assets on the balance sheet, offering steady interest income, long tenures, and strong collateral backed by recoverable property.

"The long tenure allows banks to build deep relationships and sell additional products like insurance, credit cards, or wealth management services," Mr Islam noted.

However, risks remain. A borrower's financial condition may deteriorate, property values can decline, and legal disputes over title or ownership may delay or hinder recovery, according to the DMD.

He said the arrangement works effectively only when both sides are realistic about capacity-the borrower must clearly understand repayment ability, while the bank must properly examine and manage risk exposure.

Regarding the home loan process from application to disbursement, the senior banker said home loans are relatively more accessible than most other loan products and carry comparatively lower interest rates, although the process follows a well-defined structure.

"The process begins with the customer submitting an application along with KYC documents, income proof, and property documents," he said, adding that the bank then moves to verification, including physical visits to confirm residence or workplace, property valuation by technical teams, and legal vetting of all documents by panel lawyers or in-house counsel.

If the application is found satisfactory, a sanction letter is issued specifying the loan amount, interest rate, and tenure, marking formal approval.

This is followed by execution of the loan agreement and creation of a registered or equitable mortgage over the property in favour of the bank, thereby securing the asset, he added.

The DMD said disbursement is the final stage. For under-construction properties, funds are released in tranches, while for completed apartments, the amount is paid directly to the developer or seller. Repayment is made through monthly EMIs.

"In the rare event of default, banks do not move immediately to legal action. Counselling comes first; loan restructuring is explored. Only when those efforts fail does the bank invoke the Money Loan Court Act, recovering dues through the sale of the mortgaged property," the banker continued.

Regarding the groups or professionals who prefer home loans, the DMD said home loans span almost all income segments, although clear patterns continue to emerge.

"Salaried professionals-particularly corporate employees and government officials-have traditionally dominated the market, supported by stable, well-documented, and easily verifiable income streams that give lenders a high degree of certainty," he said.

At the same time, two segments are gaining momentum: non-resident Bangladeshis, driven by emotional ties and remittance-backed income, and business owners, as improved financial reporting and formalisation expand their access to housing finance, according to the DMD.

Regarding NPLs in the sector, the senior banker said home loans maintain one of the lowest NPL ratios in retail banking, driven not only by financial factors but also by the structural characteristics of the product.

"A home is not just an asset. For most families, it is a life goal -- sometimes a generation's worth of sacrifice compressed into a single purchase. The psychological cost of defaulting on that is high," the DMD explained.

He also said rising living costs have added some pressure on repayment behaviour, and that is a reality worth acknowledging.

However, compared to commercial or corporate lending, recovery performance in this segment remains relatively robust, he added.

"Most banks maintain NPL ratios in home loans well below the industry average. The property security helps. But the borrower's emotional stake in the asset may matter just as much," the DMD added.