Tackle home loans a step at a time
With the financial world in turmoil once more, buying a property in the UAE may not seem like the best option at the moment.
But with interest rates coming down and some lenders re-entering the market for the first time since the global meltdown of 2008, the appetite for home loans is on the up.
Bank mortgages issued in the UAE hit Dh163.19 billion (US44.43bn) last year, up by 15 per cent on 2009, and demand for home loans has continued to rise in 2011 caused by a combination of lower house prices - down by 50 to 60 per cent from the peak - and banks making it easier for consumers to actually secure a mortgage.
"There is a lot of money in the banks at the moment because of large inflows of cash due to the turbulence in the region and the austerity measures put in place since the credit crunch," says Warren Philliskirk, a senior mortgage manager at Globaleye.
"While the banks have this liquidity they have to use it, so mortgage rates are being squeezed at the moment."
With 28 lenders now competing for business - a dramatic increase from the dark days of the crisis when the mortgage industry came to a virtual standstill - housing loans are now being offered at rates as low as 4.99 per cent, down from the 8 to 9 per cent witnessed during the crisis period.
Standard Chartered, the latest lender to jump on the property bandwagon, recently announced a fixed-rate Ramadan offer of 4.99 per cent for the first 12 months, matching United Arab Bank for the lowest rate in the market.
HSBC Middle East is offering a 5.49 per cent interest rate for 25-year mortgages, while Barclays is offering 5.99 per cent. And more banks are also offering financing for up to 85 per cent of the value of a home instead of the previous 70 to 75 per cent.
"It's a huge difference on 12 months ago when everyone had pretty much shut up shop or had created terms in their policy that were so stringent they were never going to lend without having to say they had closed," says Mr Philliskirk.
It appears the banks have also learnt to tread more carefully, only offering loans to people with solid credit histories who plan to live in the home they buy.
"We encourage end-user financing on completed properties," says Ishrat Kiyani, head of premium banking, wealth management and mortgages for HSBC. "Off-plan but near-completion projects in Abu Dhabi and Dubai can be looked into based on the overall project completion report conducted by an independent valuator."
While HSBC was one of the few lenders to stay open for business during the crisis, many others stopped offering mortgage loans, including the Dubai-based Islamic mortgage lender Tamweel. It relaunched its home loan products earlier this year following a restructure.
Tamweel has not only returned with lower rates, but also a refinancing option allowing owners of fully-paid properties to unlock up to 50 per cent of the value of their homes and finance options for overseas buyers - another sign the lenders want to make it clear the UAE property market is healthy once more.
"Stability in prices is essential for our industry and for the real estate market," says Varun Sood, acting chief executive officer of Tamweel. "We have noticed that prices have stabilised in mature and fully completed projects. Other important indicators such as liquidity and confidence have significantly improved. All these factors point towards a positive outlook. We have seen an increase in the uptake of home finance applications and, in fact, the demand we are seeing has been greater than anticipated at the beginning of the year."
But while the mortgage market is keen to distance itself from the days of buyers flipping properties to make a fast profit, they have not shut the door on the idea of the UAE property market becoming a haven for pure investors once more.
"Today, customers are looking for ready residential properties and they want to see what they are buying. They are mostly end users with significant equity participation. And when the need for off-plan property revives in the market, we will reassess our position and offer products to this segment by putting in place a risk assessment framework which will protect both the customer and us," adds Mr Sood.
But despite the renewed energy in the mortgage market, Mr Philliskirk believes it is unlikely rates will go as low as those offered in the more developed markets in the west.
"While the banks are paying 3 and 4 per cent deposit rates, mortgage rates of 5 and 6 per cent are about as low as they can go because they still have to generate a profit. So it is a good time to lock in a good long-term rate."
If you are unsure how to navigate your way through the myriad of home loans on offer, our 10-step guide will find the right deal for you.
Step 1: Get advice
If you have done the research and know exactly which bank you want to borrow from, go and meet an adviser to find out how much you can borrow. Alternatively, seek the services of a mortgage broker, who should not charge you for an initial assessment and will know all the options available.
"A broker can look at your income and expenditure and give an indication of what your budget would be subject to credit approval from the bank, so you know straightaway what you can buy. Because they buy in bulk, a broker can also negotiate better terms and rates. They will also carry out all the paper work on your behalf and ensure the process goes as smoothly as possible," says Mr Philliskirk.
Clients who don't want to stump up the Dh5,000 or more they will have to pay for a broker's services can do the research process themselves as all the banks are happy to share the terms and conditions of their home loans.
Step 2: Get the right deal
Decide early on what you want from your mortgage. Ask yourself if you want a fixed rate, a 25-year repayment period or flexibility to move between lenders?
"If a client desperately needs 85 per cent, which is generally the top of the market, that restricts them to a smaller number of lenders that will lend to that level," says Mr Philliskirk. "If someone has a higher deposit amount such as 25 per cent or above, they have a choice of all the products available."
For those who think they can pay off their mortgage early, pick a product that lets you make extra payments on the loan from the offset at no extra cost. While some banks allow overpayment of up to 30 per cent, others have no cap in place allowing you to pay it off immediately if you want to.
Mortgages are open to both buy-to-let and end users and there is no difference in the rates - though some banks are only interested in issuing owner-occupier mortgages which could limit the home loan choice for buy-to-let purchasers.
And while having more than one mortgage is certainly possible if you have all the finance in place, some banks might refrain from people with multiple mortgages. "They consider it an investor profile and they don't particularly want that client," says Mr Philliskirk.
Step 3: Get approval
Before you even start looking for a property, get your approval in place so that you have a clear idea of what your budget is. While some banks have no minimum income, others require a salary of at least Dh10,000 to Dh15,000. Remember, you don't want to sign a contract with a seller and then find out there is a problem with your finance approval. Once approval is in place, it is valid for up to 90 days depending on the lender and can be renewed with fresh documentation.
To get approval, you need:
* A salary letter from your employer with a full breakdown of your remuneration
* Six months personal bank statements
* Copies of your recent credit card statements
* Proof of address (either a tenancy agreement or utility bill)
* Copies of any car loans, personal loans or mortgages you may have in the UAE
* If you regularly send money to your home nation to support a mortgage at home, the bank may want a copy of that mortgage agreement as well
* Copy of your passport and visa page
Step 4: Be honest
Tell the lender or mortgage broker everything about your credit history and the number of credit cards, loans and mortgages you have. The lender will carry out a Central Bank cheque on applicants that will throw up any previous default on loans or bounced cheques.
By being honest about all your liabilities, you will also avoid taking on a mortgage you cannot afford.
Banks are guided by the Central Bank, which recommends the maximum amount of a person's income going towards any financial agreements - including mortgages, personal loans and car loans - should be around 50 per cent. Any rental income you buy on the property will be added back into the equation.
Step 5: Know your fees
There are a number of fees you will pay in addition to the deposit, so make sure you keep some money aside as the fees account for 4 to 5 per cent of the total purchase price
Fees to watch out for include:
To the banks:
* An arrangement fee. All the banks generally charge this and it is typically 1 per cent of the mortgage
* Valuation fee of Dh2,500 to Dh3,000 for valuing the property
* A processing fee upfront of Dh1000
To the Lands Department:
* Transfer fees of between 1 to 2 per cent of your purchase price
* A mortgage registration fee of .25 per cent
* Document fees of Dh375
* Mortgage broker: From Dh5,000
* Conveyancer: From Dh5,000
Step 6: Avoid hidden costs
Deciding you want the interest rate to be calculated is key as it can affect the charges you pay further down the line.
Although banks should ideally track the Emirates interbank offered rate (Eibor), the rate at which banks borrow money from each other, few do. Instead they determine their own variable rate which can be risky for the customer as it means the bank can increase and decrease that rate when they want to.
"It is always best to have a fixed rate or a rate calculated on the base rate rather than by the bank as they wish. And look for any penalties that some of the banks charge such as extortionate transfer penalties of up to 5 per cent that entrap people as it becomes too expensive to switch to another lender," says Mr Philliskirk, who also warns buyers to look out for hidden buildings insurance costs.
"Some lenders will also charge buildings insurance on apartments - something that is already covered in your maintenance fees. These are all hidden factors that you need to avoid," he adds.
Step 7: Get life insurance
Life insurance is mandatory for all UAE mortgages and can either be a policy of your own choice or a compulsory policy from the lender.
"There are only three or four banks that let you sign your own policy, so you have to have the insurance provider of their choice which means it can be more expensive," says Mr Philliskirk. "If you are relatively healthy and in your 30s or 40s - you can get cover at 0.25 per cent per annum - but the insurance the banks offer is generally 0.5 per cent on the mortgage amount so this becomes something you are overpaying on."
And watch out because the banks' in-house policies are generally not portable - so if you move to another lender as you come to the end of your deal - you can't take that policy with you and as you get older getting a new policy will be increasingly more expensive.
Step 8: Sign the contract
Once you have picked the property you want, you will sign a memorandum of understanding (MOU), which is an agreement between buyer and seller.
Either an estate agent or a conveyancer, the branch of law concerned with preparing documents for transferring property, will draft the MOU between the buyer and seller. The point of the MOU is to establish clear parameters on:
* The agreed price
* The timing of the sale and the date of transfer
* The fees involved
* The structure of the deposit and balance of payments
* Clearance of any existing mortgages of the seller
When it comes to transferring the funds, a conveyancer can manage the transaction and monitor the process at the Lands Department on your behalf as long as you have given them power of attorney to do so.
Step 9: Be patient
While the actual transfer of the property from seller to buyer can be done in a day, allow five weeks from finding a property to actually owning it.
If the buyer or seller are in a property chain, it can lengthen the amount of time it takes. Someone who is self-employed (anyone with more than 10 per cent shareholding in a company) should also expect the process to take up to 50 per cent longer as the banks will be far more inquisitive about the state of their financial affairs.
Step 10: Have a backup plan
As recent history has shown, there are no guarantees your financial future will be secure so it's a good idea to have a backup plan if things go wrong and you lose your job. Unfortunately there is no income protection insurance in the market so if you cannot make the repayments, the only option is to sell the property.
But it is certainly worth calling your bank to see if they would offer you a repayment holiday while you sort your personal circumstances.
"Some lenders have been very good in terms of the flexibility they have afforded people when they have hit difficult times - changing their clients' policies to interest-only or offering a payment holiday of between six to 12 months," says Mr Philliskirk. "Others have been terrible and given people very little help at all.
"Therefore knowing the track history and behaviour of the different banks is also important."
Published: August 27, 2011 04:00 AM