Bad Time to Be a Defaulter in Pakistan As Banks Can Now Sell Mortgaged Homes

The Senate has approved the Financial Institutions (Recovery of Finances) Amendment Bill 2026, introducing stricter recovery mechanisms for housing finance defaulters and granting banks greater authority to recover outstanding loans through the auction of mortgaged properties.

Under the new law, borrowers who default on housing finance obligations will be issued three written notices, each separated by 30 days. If the borrower fails to settle the outstanding amount after the final notice, the lending institution will be authorized to auction the mortgaged property to recover its dues.

One of the most significant changes introduced through the amendment is the removal of the requirement for prior court approval before the auction of a mortgaged property. Financial institutions will now be able to initiate the auction process directly after fulfilling the mandatory notice requirements.

The legislation also seeks to provide borrowers with additional opportunities to resolve disputes before foreclosure. Banks will be required to decide on requests for loan restructuring or settlement within 30 days of receiving an application from the borrower.

According to the new framework, an auction can take place no earlier than 15 business days after the publication of the auction notice. Financial institutions will also be permitted to participate in the auction process themselves, while borrowers will be given a final opportunity to match the highest bid within five business days.

The amendment further strengthens enforcement powers by allowing banks to seek direct assistance from deputy commissioners to obtain possession of mortgaged properties. Deputy commissioners will be required to take possession of the property and hand it over to the financial institution where necessary.

The law also places restrictions on court intervention by specifying that banking courts cannot issue injunctions against recovery proceedings without first hearing the position of the financial institution involved.

The legislation is expected to come into force after receiving the assent of the President and is aimed at strengthening Pakistan’s housing finance framework by improving recovery mechanisms and reducing legal delays that have historically discouraged mortgage lending.