Dubai: Refinancing their mortgages is proving to be the easiest option for property buyers in the UAE struggling with their monthly payment commitments.
With home finance rates at record lows and banks going out of their way to ensure their existing mortgage clients do not default on their payments, refinancing may just be the answer to everyone’s needs.
“I went in for a refinance because the rental income I was getting from the apartment (at Downtown Dubai) has dropped by 20 per cent,” said one buyer. “And it was vacant for four months last year until I found a new tenant, which also hurt my income. Refinancing my mortgage commitment thus was a necessity.”
Standard mortgage rates now average below 3 per cent as against the 5 per cent and over from two to three years ago. Plus, lenders are even offering promotional rates “as low as 1.99 per cent,” according to Michael Hunter, Co-founder of Holo, a Dubai-based fintech consultancy that specialises in mortgages. “There has never been a better time to finance a property.”
What this essentially does is give the property owner a chance to rejig his monthly payments to a lower level. When mortgage rates have dropped this low, and expected to remain so, it is proving to be the go-for-it option.
Raise the LTV
Another factor is convincing UAE property buyers to do so – in March last year, the Central Bank announced a series of initiatives to help residents and businesses absorb the financial impact brought on by the pandemic. One of these was to raise the Loan-to-Value ratio for first-time homebuyers in the UAE.
So, banks were allowed to offer home loans of up to 80 per cent – from 75 per cent - for first-time expat buyers on properties valued at under Dh5 million. For UAE nationals, the increase was from 80 per cent to 85.
So, if a buyer has taken a mortgage from one bank, given the new LTV limits, he could re-negotiate to raise his loan or seek another lender that would so. This way, the buyer reduces the down payment commitment… and also makes full use of the lower interest rate.
“These low rates are even enticing would-be cash buyers to opt for mortgages, so they can make their money work better elsewhere, rather than being tied up in a single property,” said Arran Summerhill, who is the other Co-founder at Holo. .
“It makes sense that this would be the case in what has been a difficult 12 months. People are looking at ways to reduce their outgoings, and since mortgages are typically the largest financial commitment someone has leaving their account each month, it’s the main liability they are going to want to reduce.”
According to Holo data, 37.4 per cent of the applications it received last year were for refinancing an existing property, with 28.6 per cent of these hoping to switch their current deal to a better rate. And 8.8 per cent were looking to release equity from their property, which was fully paid in cash.
How easy is it?
Banking industry sources confirm that demand is there for mortgages, especially among first-time- buyer prospects. Many had delayed their buying plans to this year, hoping this would give them a better feel of the economic situation and of their own financial situations.
But developers, especially in Dubai, have been offering post-handover payment plans and keeping the down payment part as low as they can. This way, developers reckon, buyers would not need to seek bank finance and pay for the property from their own income. Many of the post-handover plans themselves are of two- to five year duration.
For instance, there are offers going around for seven-year post-handover plans on a just completed tower at Business Bay, with prices from Dh710,000. The units are being handed over now.
Post-handover plan vs. mortgage
With developers taking every effort to reduce the payment load, do buyers still need to be searching around for banks willing to lend them?
Hunter believes that mortgages are definitely not on the decline in popularity. “If we look at a property valued at Dh2 million bought on a five-year payment plan, the monthly cost to the buyer would still be Dh33,300, normally paid in quarterly or bi-annual installments,” he said.
“For the majority of buyers, this would still be out of reach, whereas a mortgage taken over the maximum tenor of 25 years could be as low as Dh7,000 per month, making it far more accessible especially to consumers that manage costs in line with their salary income.”
There are other reasons that make sense to mortgage.
“It may be in the interest of developers to encourage home loans rather than post-handover payment plans in the future,” said Summerhill. “The added layer of governance and stringent background checks conducted by banks to ensure the suitability of a customer - and their ability to complete payments - could lead to lower default rates.”