With mortgage-based transactions accounting for a larger share of transactions, potential homeowners need to bring their best game while shopping for a home finance product. In an effort to stabilise the market and reduce speculative property buying, the UAE has enforced regulations for the loan-to-value (LTV) ratio and a cap on home finance in proportion to the cost of a property.
The mortgage cap — a regulation prescribing the LTV ratios, the source of down payments and financing tenure — applies to home finance. First-time expat homebuyers need to put up 25 per cent of the value of the property for property costing Dh5 million or less and can avail of 75 per cent bank finance. UAE nationals can get 80 per cent of a similarly valued property financed and need to pay 20 per cent of the deposit themselves.
Combined with a set debt-to-burden (DBR) ratio, this limits purchasing power and prevents customers from overextending themselves. The maximum permissible DBR is 50 per cent, which means that the monthly instalment/commitments of credit cards, loans or any other repayments should not be more than 50 per cent of the total income of an individual.
PW speaks to bankers about common mistakes to avoid when going for home finance
Get pre-approved for a home loan
Don’t wait until you find the house of your dreams. Imran Ahmad, product manager, RBG, marketing and product development at Sharjah Islamic Bank, says “skipping mortgage qualification upfront” is one of the key mistakes that home finance aspirants make. “What consumers think they can afford and what the bank is willing to lend may not match up,” says Ahmad. “So make sure you get pre-approval for a loan before placing an offer on a home.”
Most banks advise customers to get pre-approval and are quite open to the process. You can easily find out what the banks are looking for when they appraise candidates for home finance.
Kunal Malani, head of customer value management, Middle East and North Africa, retail banking and wealth management at HSBC Middle East, says, “We urge [customers] to talk about approval in principle. We will try to turn it around in an hour. That gives you a shopping budget. Measure what you can afford to buy with your deposit,” says Malani.
Inaugural promotions may come with strings attached
With home finance rates at a relative low, banks may vie with each other to present attractive rates. Iqbal Shaikh, head of retail banking at Ajman Bank, warns, “It’s important that customers are not just lured by the inaugural low promotion rates offered by banks, which are generally valid only for a short period.
“Banks revert to their standing pricing at some point, which can later prove to be more expensive.”
The introductory offer will only last for a particular period. Calculate how much you will actually end up paying by the end of the tenure.
Ahmad says, “Consumers generally do not pay more attention to the rate, which is applied at the later stage of the financing tenure. At present, there are a lot of banks that offer an introductory rate, which is fixed for the initial one, two or three years, and then flips to a floating rate, which is a combination of Emirates Inter Bank Offered Rate [EIBOR] and the margin with a minimum profit rate as a floor rate.”
Set by the UAE Central Bank as an average from a panel of banks, the EIBOR is used by both conventional and Islamic banks to benchmark mortgage variable rates or rental rates for Ijara leasing agreements.
“Consumers get tempted by the rate offer as an introductory offer rate, which is usually very low,” says Ahmad. “They should be focusing and paying attention to the rate once the introductory offer rate period is over.”
Be creditworthy
With the Al Etihad Credit Bureau in place, the home finance market is now increasingly transparent. For customers, this means that they can prepare for a home finance assessment.
One of the biggest mistakes is to ignore the credit cards one has acquired over time. Ahmad says, “Close down unused or inactive credit cards, which read as full liability in the credit report. This helps in reducing the overall debt burden ratio when you consider home finance or any other type of finance.”
Effectively, this means that if you have credit cards with a certain credit limit, that limit is counted as your liability, even if currently you have not used them. Cancelling unused credit cards is very important if you want to be approved for home finance.
Banks will also check the source of your share of home finance. “We ask them to share with us the source of funds,” says Malani. “We look at bank statements. We would not encourage a mortgage at all should a deposit be funded through a series of loans. The system will catch you.”
Plan for your life, not just the house
When shopping for home finance, long term works best. Take into account your potential expenses — is the family likely to see medical expenses go up, are school costs covered for as long as they are needed, and are you likely to take a sabbatical for parenting or higher studies? Is the mortgage still affordable?
Malani says, “Buying a home is one of life’s key long-term ambitions. A mortgage should not be seen as a one-off transaction, but rather as a part of your long-term financial plan, as it allows you to steadily build equity in your property over time.”
Look at the overall cost of ownership
The cost of home ownership is not as simple as replacing your rent with your mortgage. Ahmad says, “Over and above these expenses, customers have to pay monthly maintenance costs regardless of whether anything needs fixing, because they’ll be part of a homeowner’s association.”
It may be better to stretch one’s budget to get a property of the right size, which may suit the family over years of growth. A starter house may be cheaper, but don’t forget to take into consideration mortgage prepayment fees, transfer costs or other associated expenses that will add to the total.
Many home loans come with a compounding late payment fee, which means the customer is charged interest on unpaid interest. There are banks that will not do this, so choose your finance partner well.
