Caution may be the watchword for local banks signing up new mortgage deals, but when it comes to remortgaging (or topping up) opportunities, it is a new ball game. In recent weeks, some of the leading home financing players in the marketplace have expanded the scope of their activities in this direction.
Telemarketing is the one tool being used extensively by the lenders to target and break through the reluctance of potential clients. They do have their work cut out by the looks of it.
"While our top-up facility has been in existence for almost as long as our normal mortgage offerings, customers remain largely unaware of it," says an official at one of the leading local banks presently going all out to get its act together on this business line.
"In the current environment, we believe there will be more than enough willing customers who would like to explore the possibilities of topping up their existing mortgages."
For the average homeowner with a mortgage, topping up principally offers two advantages. For one, it reduces the size of the monthly payment to the bank, and, just as importantly, the homeowner gets any excess cash that's left over after making the payments.
"If the customer needs to release extra cash and the new rate is attractive, then it is beneficial for him to do this," emphasises Chris Dommett, CEO of John Charcol, an independent mortgage brokerage firm. "However, if the new interest rate is higher than the existing one, it could be a sign that he is borrowing more just to survive a current cash flow problem. It could lead to the borrower over-extending himself and taking on an expensive long-term debt."
Of course, there will be much time, effort and hassle involved for homeowners in registering the new mortgage at the Land Department, in transferring the life insurance policies, and issuing fresh batches of blank cheques and other guarantees. Even after these charges are accounted for, the homeowner still stands to gain a lump sum that can be used to settle other debts, to invest in a more profitable venture, or simply, to use in lieu of a depleted income.
Banks are just as well placed from entering such arrangements, or even more so. By seeking out existing mortgage holders and assessing their payment history, banks get to considerably reduce their risks.
"Lenders are only really interested at the moment in completed properties being bought, or already owned by what they consider to be low-risk borrowers," says Dommett.
"Existing clients who have established a track record of regular repayments are considered lower risk than fresh borrowers, particularly in the absence of an effective credit bureau."
Once such an arrangement is entered into, it is conceivable that these clients would not mind expanding the scope of their dealings with the bank over and beyond the mortgage facility.
What banks often forget to mention, or limit it to the small print, are the number of not so obvious charges associated with the remortgaging or topping-up process, including — but not limited to — early repayment charges on the old mortgage, a processing fee for the new mortgage, and the new interest rate that is often calculated for a longer tenure.
"The main deterrent to top-ups at the moment is the valuation of the property, with present values back at 2006 or 2007 levels, there are very few customers with surplus equity in their property," Dommett adds.
"Even if there is spare equity, the cost of a top-up should be carefully considered. Fees and interest rates remain relatively high by global standards."
What's it all about, in clear terms
A remortgage is effective only when one legal charge over a property is substituted with another, in favour of a new mortgage lender. Switching from one mortgage scheme to another with the same lender does not technically qualify as a remortgage — this is more correctly addressed as a top-up facility.
Even then, the term is being used loosely in local parlance as Dubai's home financing banks gear up to actively promote it. A top-up does exactly what it says — it allows a homeowner to top up his or her current mortgage.
Working on the assumption that a homeowner has a mortgage for Dh1.2 million — the value of the property at the time of purchase, say three years ago — this can now be extended to a current evaluation of the property's price as decided by the lending bank.
If the evaluation works out to a current price of Dh2 million, the bank would be willing to offer the difference in principal and make it available immediately to the homeowner, minus the various processing fees and charges. Often, the tenure of the loan could be extended.
