Rate cuts prime mortgage market

Mortgage lenders enter a race to cut interest rates, in a sign of increased confidence in the UAE's property market.

The UAE's mortgage market is heating up, with the international banking giant HSBC becoming the latest lender to cut interest rates.

HSBC lowered rates on conventional and Islamic mortgages to 5.49 per cent for new customers who put down a 40 per cent deposit, and also reduced arrangement fees for its existing customers.

"Mortgage prices are going down because the valuations of properties are getting better," an HSBC spokeswoman said. "The risk profile of consumers in the industry will be better, so the bank has priced accordingly."

The bank now offers the country's lowest rates for conventional mortgages, albeit with higher deposit requirements than are applied by similarly priced competitors.

The UAE's financial crisis was preceded by a credit boom in which some lenders provided mortgages for almost the full value of properties, requiring only scant deposits from buyers.

So far this year, a number of lenders have reduced mortgage rates. In January, Abu Dhabi Finance, the capital's largest mortgage lender, announced rates of 5.75 per cent, which until now were the lowest rates being offered on conventional mortgages in the country. It requires a deposit of 15 per cent of the purchase price.

Later that month, the Islamic mortgage lender Tamweel reduced profit rates on ijara financing agreements to 4.99 per cent, with a deposit of 20 per cent of the value of a home.

Ijara financing agreements are similar to leases, with the option to purchase once the principal has been paid.

Standard Chartered said last week it would bundle mortgages with pre-approved personal loans of up to Dh250,000 (US$68,000) and credit cards with no annual fees.

Raj Madha, a financial analyst at Rasmala Investment Bank, said banks were anticipating that the property market would begin stabilising, "providing that the labour market is more stable, so that people are less likely to suddenly lose their jobs than they were before".

Banks' increased focus on mortgage lending showed they had learnt lessons from the property bubble, he said. "There has been a realisation that even in a very negative situation, such as when property prices halve, the impact on mortgage books hasn't been disastrous."

Although property prices have slumped since the onset of the global financial crisis, some analysts said positive signs were emerging.

"We're seeing some selective stability in some areas," said Craig Plumb, the regional head of research at Jones Lang LaSalle, adding that a recovery was under way in upmarket locations such as Dubai Marina and the Burj Khalifa area.

"That's still the exception rather than the rule," he said. "The average across the board is still declining."

However, increasing competition among mortgage lenders would help to lift UAE property values, he said. "In order to get better valuations, we need to see the return of liquidity. The more banks offering competitive mortgages has got to be a good thing, particularly as we're now seeing the market dominated by the end user," Mr Plumb said.

He expected that HSBC's relatively high deposit requirements would result in a market with more people buying property they intended to occupy and fewer speculators hoping to flip properties for profit.

"A significant commitment from the end user and the purchaser is in many ways going to take out the danger of a speculative bubble building," he said.