When purchasing property using bank finance in the UAE, a buyer will have to shell out at least 25 per cent of the price upfront, as per Central Bank regulations. Many property stakeholders believe this limitation is holding back a sizeable portion of potential homebuyers, and suggest that authorities should instead increase the loan-to-value (LTV) ratio to encourage first-time buyers.
Industry analysts generally agree this is a good idea, although some say a higher LTV, which essentially lowers the down payment to buy property, should not be the norm. Instead, an exemption could be made for first-time buyers. Another approach is to encourage other purchase schemes that are attractive to first-time homebuyers, such as rent-to-own options.
Property Weekly talked with property experts on the key points to consider about the LTV ratio.
Mario Volpi, sales and leasing manager, Engel & Völkers
In 2013 the Central Bank introduced a maximum 75 per cent LTV rate to cool a potentially overheating market, and it achieved the desired effect. Six years on, there are calls for a reversal or at the very least a softening of this stance. If the LTV will be relaxed to say 85 per cent, this would be a very positive step for the secondary property market as there is a high demand, but would-be buyers are struggling to raise the required 25 per cent deposit. If the banks come up with a specific first-time buyer mortgage product, I believe this will create a more fluid market that would benefit all.
Lewis Allsopp, CEO, Allsopp & Allsopp
There doesn’t need to be a widespread higher LTV ratio, but I do feel there is a definite need for a first-time buyer product. The buyer sentiment is there. For example, over the last few weeks in Jumeirah Golf Estates, the developer spread the down payment of 25 per cent over 18 months on a ready stock. As a result of this attractive payment plan, only one villa remains available in Redwood Park, and 60 per cent of Whispering Pines stock has sold. This is a microcosm of the market, showing that there is a desire in people to want to buy property in the city but, in some cases, the affordability is holding them back. Once we see movement in first-time buyers, we will see a domino effect through the market with a lot more activity, positivity and confidence.
Fadi Nwilati, CEO, Kaizen Asset Management Services
A higher LTV generally increases the number of people who can enter the real estate market. However, we must not forget the reasons why LTVs were reduced a few years ago to the levels they currently are. If the authorities were to increase the LTV, it is essential that banks are more careful in their application review process to make sure that the mortgage applicant, particularly first-time homebuyers, can cover the mortgage payments. Banks must educate mortgage applicants to understand the various fees that accompany a mortgage. What will be more impactful to the market is having more rent-to-own products by developers. It is less risky and it may well be a smoother process for first-time homebuyers.
Myles Bush, CEO, PH Real Estate
I think if banks were to reduce the 25 per cent deposit to say 10-15 per cent, there would be a huge number of people who would bite the bullet — stop renting — and start looking to buy. If the banks were to lend this little bit extra, we would see a sharp increase in the number of people looking to purchase, which would inevitably mean fewer people looking to rent — this, in turn, may well reduce already-inflated rental prices. Helping buyers get onto the property ladder is not only a good thing economically, but it also helps with the retention of expats here in the UAE.
Know the risk
Rakesh Mirchandani, director, KGR Real Estate
In some countries, higher LTV ratio, grants and programmes are available for first-time homebuyers. Lower interest rates and higher LTVs are undoubtedly crucial factors to stimulate real estate transactions, but the latter carries significant risk. The lenders want to get their monies back along with interest. In the case of a default, the lenders will need to be able to sell the property considered as the collateral; hence, the LTV will determine the risk, and a higher LTV would mean that the property is less likely to pay off the loan. By keeping the LTVs lower, the banks want to make sure borrowers do not take out mortgages they can’t afford. Over the years, we’ve seen an increase in buyers taking up fixed interest rates in anticipation of the rise in interest rates. This can help and motivate renters to buy and move into their own property. This way they would make a lesser down payment, and it would help with their cash flow. Also, it can offer a higher percentage of return on their equity/investment when the property prices increase.