Is now the right time to apply for a UAE mortgage?

When Fahmi received the handover notice for his villa on Abu Dhabi’s Yas Island in mid-March, he faced a difficult decision: sell the property or apply for a mortgage to cover the outstanding balance.

Declining to give his full name, Fahmi looked into the rate over five years for a Dh2.5 million mortgage and found it to be expensive, costing “close to Dh180,000 in interest”.

Shortly thereafter, he came across a limited-time offer from the property developer Aldar through three lenders: a 1.99 per cent rate over five years with no application or valuation fees.

“Now with this offer, I’m only paying Dh113,000 over five years. You’re talking close to 40 per cent reduction,” says Fahmi. “It’s as cheap as getting a car loan.”

While he was leaning towards selling to free up capital amid the Covid-19 uncertainty, the “phenomenal” rate changed his mind.

I’ve been doing home finance in Dubai for 15 years now and it’s the lowest I’ve ever seen interest rates in the UAE

Richard Boyd, director at Mortgage Finder

“When I looked at the mortgage rate and the monthly payments and the fact I’ve been here for 20 years paying rent, I thought ‘this is an opportune time for me to move to a house’,” he says.

As the coronavirus continues to spread worldwide and the global economy slips further into recession with millions of people losing their jobs, it may not seem like the opportune time to add the hefty financial commitment of paying for a mortgage.

However, favourable rates, fee waivers, a reduced loan-to-value ratio, bank payment holidays and the removal of the early settlement fee are all reasons to apply for a new home loan or renegotiate an existing one in the UAE.While there are factors to take into account, such as the decline of real estate prices in recent years and job security, mortgage brokers say property buyers should take advantage of exceptionally low borrowing costs.

“I’ve been doing home finance in Dubai for 15 years now and it’s the lowest I’ve ever seen interest rates in the UAE,” says Richard Boyd, director at Mortgage Finder, part of the Property Finder Group.

With the US Federal Reserve slashing its benchmark interest rates to near zero in emergency moves in March, the UAE has seen interest rates come down significantly in that period, given that the dirham is pegged to the dollar.

The Central Bank of the UAE lowered its benchmark interest rate by 50 basis points to 1.5 per cent in early March and then cut its rate on one-week certificates of deposit by 75 basis points a couple of weeks later.

Banks, as a result, have become more competitive with their mortgage offers. "The central bank interest cuts has enabled banks to offer longer lower fixed rates and people who are on variable rates will also have seen a decline in their monthly payments for the most part,” says Stuart Roe, head of mortgages at Allsopp & Allsopp real estate agency.

As part of the central bank’s Dh256 billion stimulus package, borrowers can also benefit from loan relief from their banks for up to six months, while first-time home buyers are eligible for a 5 per cent increase in the loan-to-value ratio (up to 80 per cent for expatriates and 85 per cent for UAE nationals) and a full waiver of processing fees.

Home buyers can now get a mortgage for the lowest fixed rate of 2.7 per cent for one year, say brokers. Fixed rates for three to five years range from 2.99 per cent to 3.5 per cent. That is about 25 per cent cheaper than 12 months ago, when an average three-year fixed rate mortgage was 3.99 per cent, says Mr Boyd.

Arran Summerhill, director of UAE mortgage broker Holo, says banks are also offering “headline rates” to further attract customers. These are often limited in time or to specific properties.

For example, the Aldar offer is only available for 30 days from April 20 and applies to customers who have already purchased or are looking to purchase homes in Yas Acres, The Bridges on Al Reem Island, and Mamsha and Jawaher on Al Saadiyat Island.

Homeowners in those communities were able to apply for financing through Abu Dhabi Commercial Bank, Abu Dhabi Islamic Bank and First Abu Dhabi Bank. Although subject to terms and conditions and approval, the offer included a rate from 1.99 per cent, fixed for three or five years, and up to six months’ deferral on first instalments.

Lower real estate prices have also been an important factor encouraging people in the UAE to get on the property ladder. Prices have gone down between 20 to 40 per cent over the last couple of years, says Mr Summerhill.

“The stimulus package and the decrease in the rates and the lower prices has offset some of the uncertainty in the market,” he says.

Over the last two months, mortgage applications through the Holo site have grown threefold. About 60 per cent are applications to refinance. Another trend is that about 80 per cent of applicants are end users, rather than investors, Mr Summerhill adds.

Mortgage Finder has seen a 15 per cent increase in mortgage applications in the first quarter of this year, compared to the same period in 2019. While there was a slight reduction during the coronavirus lockdown period, the numbers have gone up since movement restrictions were eased, Mr Boyd says.

Refinancing accounts for much of the increase in mortgage applications, according to brokers.

“Some clients are stuck still paying anywhere from 5 to 6 per cent, so potentially there’s good savings to switch,” Mr Boyd says.

In October, the central bank removed the 3 per cent early settlement fee for mortgages introduced in 2018 and reverted to a 1 per cent or Dh10,000 cap, whichever is lower.

Combined with low interest rates and increased lending, “it’s suddenly become a lot more relevant to look at refinancing the loans that they’ve had”, says Mr Summerhill.

There are some factors to consider, however, including the decline in property values, the percentage borrowed, the outstanding amount and the fees associated with moving to another lender.

“The downsides of switching mortgage lenders are that some people may not be able to leverage their position if their outstanding amount is less than 75 per cent of the value,” says Mr Roe.

It is still worth investigating, says Mr Summerhill. A valuation costs Dh2,500 to Dh3,500, but homeowners can get a free estimate of the value of their home at homevalue.ai.

However, it is at the discretion of banks how much to lend up to the maximum ratio, whether for a new mortgage or refinancing. As businesses and others affected by Covid-19 look to release equity from properties, some banks have reacted by limiting the amount, says Mr Summerhill.

“Some banks were only going up to 20 per cent as a maximum and they wanted to see if that was being used for property renovations,” he says. Other banks put a 50 per cent cap on “cash out”, while still others have been happy to lend at the normal limits of up to 80 per cent for a first property or up to 60 per cent for a second.

In these uncertain times, job security is another key consideration. “If you’ve lost your job and you’ve actually signed to buy a property, then that can be tricky because the bank may recall the finance offer,” says Mr Boyd.

The good news is that banks are being more flexible, with some lenders willing to offer “interest-only for up to a year to help”, he says. Even clients whose salaries have been cut have had mortgage applications approved, but it depends on the bank. Home buyers in hard-hit industries such as aviation and oil & gas may also get rejected.

For Fahmi, a senior manager with a UAE company, it helped that he had a “good standing” with his bank ADCB to apply for the mortgage. With “an attractive payment scheme” from Aldar, he was able to put 10 per cent as an initial down payment on the four-bedroom villa in 2016 and pay 20 per cent before handover. He chose to pay another Dh1m in cash, paying 50 per cent of the value of the Dh5m property before taking a mortgage.

Although he was wary of the current situation, he says he felt it was the right time to move to his own home with his wife and four children.

“It is dire and difficult for many people," he adds, "but I found it too good of an offer to let go.”