Dubai
Home refinancing in the UAE has taken a big knock in the last 10 days following the Central Bank’s directive capping mortgage exposures to individuals. This is because existing mortgage holders can no longer aspire to get the cost benefits from refinancing with another bank that they were used to until the cap was imposed this month.
The Central Bank requires that non-Emirati residents can only avail of mortgages up to 50 per cent of the property’s value whereas earlier the average used to be 70 per cent. For Emiratis, the cap has been set at 80 per cent.
Now, the mortgage holder (assuming he is a non-UAE national) will have to put up 50 per cent of the property’s value as equity even to seek refinance. The high upfront payments would thus cut deeply into any cost benefit the property owner may have from the lower interest on the refinanced deal.
Also, mortgages taken in late 2007 and in 2008 valued properties at their peaks. Even with the recent gains in values, many properties are still a long way off from the highs. In other words, this means a refinanced mortgage deal would go by current property values, again placing the homeowner at a disadvantage.
Refinancing allowed existing mortgage holders to exit an arrangement with a bank and go in with another at much lower rates. The savings from doing so were quite substantial; for instance on a Dh1 million plus property, the EMI for the mortgage owner could be lower by anywhere between Dh1,500-Dh2,000 a month. On a 20-year loan tenor, that would work to substantial savings.
For the refinancing bank, it meant “acquiring” a customer with a good track record of meeting payments regularly. Some of these banks were even offering additional incentives if the customer would sign up to do their salary transfers and other services through them.
In fact, until the Central Bank directive on mortgage caps, refinancing deals offered one of the strongest growth categories for many UAE banks’ retail divisions. “At a time when customers had no choice but to avail of uncompetitive rates in excess of 8 per cent, targeted risk-based pricing models completely overhauled and re-energized the property market in the UAE,” said Tom Smith, executive vice-president and group head of retail banking at United Arab Bank, which got into mortgages in October 2010.
“Recent trends show an increase in first-time buyers and a slowdown in refinancing as most banks are willing to bring down rates for their customers to discourage them from switching banks.”
Currently, the variable mortgage rates available in the local market range between 4-4.5 per cent (fixed for a one-year period). “This range covers most of the active local and international banks in the market and implies a spread of approximately 2.35-2.85 per cent over the benchmark one-year Eibor rate,” said Chandrakant Whabi, CEO of Acrohouse Properties and a former treasury banker.
“This is slightly higher than what’s prevailing in US or UK where variable mortgage rates are currently about 2 per cent above their respective benchmark rates.
“Some banks do refinancing on the same terms as new mortgages while some attach slightly more risks and reduce the loan-to-value (LTV) by 5-10 per cent and increase their spreads by 0.5 per cent. The refinance rate is still cheaper than any other sort of loan from a bank like corporate or personal and, hence, still attractive for clients looking for finance.”
As for wider the property market, industry sources believe the Central Bank’s intervention is warranted. “Despite the expected retraction from the initial legislation, the steps taken are sensible,” said Richard Paul, director of residential valuations, Cluttons.
“The Central Bank’s aggressive directives will go some way to discourage sentiment-driven investors, who helped grow the bubble of 2008. Discouraging investors who look to make fast profits by flipping property is a good move... but we cannot lose the backbone of our property market who are the first-time buyers.”
Finding a balance is what the market needs right now.
