Competition is heating up on the UAE mortgage scene, with banks resorting to aggressive interest rate cuts. Going below the crucial 5 per cent mark, mortgage rates are currently about as low as they can get. So, why not take advantage of a promotional interest rate offer and lock yourself into a long-term mortgage?
While lenders have shifted into overdrive to woo customers looking to secure a new mortgage, spare a thought for existing homeowners who are locked into the exorbitant 8 or 9 per cent interest rate characteristic of the boom period. The way out for customers caught in such a situation is to opt for a remortgage facility, which makes it possible for them to pay off the current mortgage with funds from another lender at a more reasonable interest rate.
However, most people looking at remortgaging are put off by hefty transfer penalties of up to 5 per cent of the mortgage amount. They perceive remortgaging to be daunting and expensive. As a result, existing borrowers tend to shy away from switching banks.
While it is true that a decision on early repayment charges (ERCs) is left to the bank's discretion, homeowners stuck with high interest rates could try approaching their lender, asking for a change in mortgage terms. In fact, banks have already started reviewing their clauses on ERC. "We have been lobbying with banks to remove ERCs," says Sam Wani, general manager of Independent Finance, a mortgage consultancy. "We have had some success as most banks have removed self-financed early repayments. We are now trying to convince banks to remove charges on remortgaging," Sam says.
Apart from coughing up early repayment charges, remortgaging also involves other costs — the new bank's processing fees, mortgage registration fees, fresh valuation charges and so on. Keep in mind that new banks are not willing to pay penalties on the client's behalf. On the face of it, these charges may seem onerous, but remember that these amount to a one-time payment only. Instead, think of the cost savings you can accumulate over the lifetime of a loan. This should make refinancing worth exploring.
So, when is a good time to remortgage? When you come to the end of the lock-in period for a fixed-rate mortgage, it's ideal to review the product and see whether it suits your personal and financial circumstances. If you have the expertise to shop around and decide on a good mortgage yourself, great. Otherwise, it's recommended that you approach a mortgage broker before remortgaging as wrong decisions could be financially detrimental. They could also suggest an appropriate product for you. "We conduct a fact-find of the client's financial situation. There are many lenders with different mortgage variants. Each is suited for different needs and preferences," Sam says.
While borrowers primarily switch lenders in order to take advantage of lower interest rates, they might also look at increasing the mortgage term, benefiting from a promotion or moving to a fixed rate.
Keep in mind the UAE Central Bank's recommendation that no more than 50 per cent of a person's income should be spent on servicing liabilities — mortgages, personal loans or car loans. Don't take on a mortgage you can't afford; be honest about all your liabilities to the new lender and the mortgage broker.
To avoid overextending yourself, here's a caveat from Sam: "Clients must take into account their monthly disposable income, age, existing liabilities, how long they expect to retain the property and contingency strategies in case of loss of income. Other issues to be looked at are the industry they operate in and risk appetite."
Before you remortgage, it would help to check the track record of banks in dealing with customers who have encountered difficult times. In case you lose your job, check with the bank if it would be willing to switch to interest-only payments for a short period or a repayment holiday of a few months.
A flexible mortgage should also let you make early payments as and when your personal circumstances allow you to.
Through my interactions with homeowners who have taken out a mortgage here, I've realised their frustration at being trapped in high-interest deals while new home buyers sit pretty, with all the competitive offers handy. But they need to bear in mind that most low-rate deals are only promotional offers, which could go up considerably after the first year. Therein lies the catch.
So, prior to rushing to secure a fixed-rate deal before interest rates rise again, weigh your options carefully. Also, avoid remortgaging your home whenever you see a better deal available since this could make lenders wary of dealing with you in future.