Remortgaging, or its bigger cousin, debt consolidation, is becoming more prevalent in the UAE as regulations that protect the customer are put into place. Financial advisers have reported a dramatic increase in refinancing in the last quarter.
Sam Wani, General Manager of Mortgage Advisory at Independent Finance tells GN Focus, “Last month during Ramadan, which is traditionally a slow month, 60 per cent of our business was remortgaging. It was also the best month we have seen in the past three to four years.”
Detailed credit reports
Market watchers say debt consolidation activity, which means combining several loans into a single new loan, will be further boosted when the national credit bureau becomes functional early next month. Al Etihad Credit Bureau confirmed recently that it would begin to issue consumer credit reports to financial institutions from the beginning of September this year.
The reports will include records about consumers’ debt levels, financial obligations, credit payments, history of default payments and late payment. Marwan Ahmad Lutfi, CEO of Al Etihad Credit Bureau, says: “The issuance of credit reports to banks and financial institutions is an important step in reducing credit losses resulting from non-performing loans and will help individuals and companies have a deeper understanding of their financial obligations and debt levels.”
Checks and balances
Chris Allen, Mortgage Broker at property investment consultancy, IP Global, tells GN Focus that increased reportage is a natural part of the cycle. “The penalties for early repayment have been topped to one per cent. There are people who have taken loans when the interest rates were between 7 and 9 per cent. Now some even offer an interest rate of 3.99 per cent fixed for three years. If you were on a fixed rate of 7 to 9 per cent you would want to get better rates.”
Mortgage rules and regulations often work as checks and balances for existing market conditions. Prior to the property market crash, high early repayment costs emerged as a reaction to quick reselling or flipping by owners.
“Because there was such a huge flipping mentality they were making a new mortgage every three months. Banks had to do all that paperwork. As a result, huge penalties were imposed by lenders on people who wanted to get out too soon.
“They would charge up to 5 per cent of the total loan. But when the market went crazy, people did not demur about paying even 5 per cent,” says Allen.
Things are different now as the market matures and one sees activity, which is reflective of any market at this stage. “According to the mortgage law introduced by the Central Bank, when you move your mortgage the maximum penalty is 1 per cent or Dh10,000, whichever is lower,” says Wani.
Developing market
With these numerous developments, the refinance market is definitely increasing in size. Wani says, “In theory, the refinance industry is as big as the mortgage industry. The way it works is that the bank will give you a rate, which goes on for two or three years. Another bank offers a mortgage at a lesser percentage. Everyone who has a mortgage will want a remortgage at some stage.”
While the customer is getting a lower mortgage rate, there is a provision of the rates being locked for a fixed amount of time. Wani says, “You will see more and more banks offering deals for a mortgage rate, which is fixed for two years, at say, 2.99 per cent. The offer will only be available for three months. People will want to switch their mortgage for these sort of deals where you are locked for two or three years.”
And as property mortgages have become cheaper in recent months, there have also been instances of customers using the equity to pay off other debts. “For those who bought property earlier, they may have more equity and lesser loan. People come to us to assess their situation, evaluate their property and opt for the product that suits them,” adds Wani.
Encouraging bank loyalty
In the UAE, another factor governing the refinance segment is consumer consolidation. With loyalty and relationship-based banking on the rise, it is natural for banks to create mechanisms to ensure every consumer’s debt needs are met in one place.
Wani says, “In one instance, our client had many credit cards and loans. With the new loan products, they cleared off expensive debts, replacing them with one single low-cost debt.”
Donna Spencer, a Mortgage Consultant at IP Global says the concept of loyalty is foreign to the industry, while refinancing is second nature. Most customers need to switch banks to get the best deal. “In the UK, for instance, there are only a handful of banks that would offer their old clients what they would offer their new clients. And sometimes if you need to remortgage, your circumstances do not work with the bank’s criteria. You may not fit the bank’s own conditions.”
