Finding new home funding solutions

How can you avoid banks and still get a mortgage? This question has been raised by many who got squeezed by the downturn in the property market, be it in the West or the UAE in the recent past. New homeowners still feel that getting a mortgage is akin to getting mugged. With the UAE property market in recovery mode, interest or profit rates on mortgages or housing finance contracts are on the rise again and credit controls are, understandably, much tighter now. Thus, people are looking for alternatives, and new ways of home financing are even seen as game changers by some.

Cash is the best option

This does not mean that these alternative methods are the best ways to buy a home. The best way is, obviously, to pay cash. If somebody has enough money in his pocket and is able to negotiate, he will most likely get the best deal. This is what is being done by the majority of homebuyers in Dubai. With the emirate’s property market on a rebound, domestic buyers, expatriates and foreigners paid cash and avoided mortgages for property and land in as many as 70 per cent of Dubai home and land purchases in 2012, up from 49 per cent in 2007, according to real estate information company Reidin.com. However, the remaining 30 per cent accounted for Dh46.2 billion in mortgages on property and land transactions as part of all real estate transactions in Dubai, which rose to Dh154 billion in 2012, according to data released by the Dubai Land Department in January this year.

“The year 2012 was a record year in terms of transaction value, which increased by 8 per cent as compared to 2011,” says Sultan Bin Butti Bin Mejren, Director General, Government of Dubai Land Department. “More than 84 per cent of the Dh38 billion in apartment transactions alone were done in cash with 25,515 units valued at Dh32 billion. 4,300 mortgage transactions were valued at Dh5 billion, while Dh1 billion had been put under other transaction category.”

However, the UAE Central Bank has recently agreed, in principle, to apply a cap on housing loans. It will be set at 75 per cent of the value of a property for foreigners who are first-time buyers and 80 per cent for local citizens.

Ryan Mahoney, Managing Director, Better Homes, estimates that as many as one in four buyers won’t be able to come up with the down payment. For those, who are not cash buyers and want or need to avoid banks for financing their home, there are some methods that need closer attention.

Seller financing

One of the alternatives is the method of seller carryback or seller financing. This method is a form of owner financing in which the seller agrees to carry the note for the purchase. This happens when a seller owns a paid-off property, doesn’t want it anymore or doesn’t mind receiving a monthly payment for it. Most of the time, however, the seller will place a time limit on when the note must be paid in full, typically between one and five years.

Another method is lease purchase. In this option, a buyer enters into an agreement to buy a home in the future when he expects to have the means, but moves into it straight away on a leasing contract. Some of the benefits of this lease purchase agreement for the buyer include crediting parts of the monthly lease payment towards a down payment, the buyer moving into the home even before the purchase is complete, and allowing the purchase price to be locked at present day values.

What has been popular with holiday homes is now also being transferred to the property market: shared-ownership houses, where multiple people form a co-operative on a single home or a group of homes. Another option would be to look out for pre-foreclosure properties and contacting the owner. In this case the buyer would take over the existing loan repayments at discount while the title is transferred, but the loan will stay in the seller’s name. A popular way to avoid bank financing in the UAE are family or private loans. Friends or families with equity to borrow against and a little trust can work out a low-cost alternative. In a tax-free environment such as the UAE, such private loans are not subject to any capital transfer taxes as they would be in other countries.