Risk-averse mortgage lenders test the waters

Excess and prudence — these two antonyms sum up the vicissitudes the UAE mortgage industry has ridden on since the heady days of 2007-2008. With customers over-extending themselves and most properties ending up with negative equity, mortgage lending reached a virtual standstill until last year. But with prices stabilising in well-established communities, lenders are making a foray back into the market with attractive offerings. At the same time, retail lending has taken on more cautious proportions, with banks undertaking stricter due diligence and credential evaluations. In the bargain, eligible applicants can now tap cheaper mortgages, a distant dream during Dubai's heydays.

Cityscape Abu Dhabi has perhaps come as an opportune moment for the lenders to test the waters. 

Mortgages for end-users

While Abu Dhabi Finance (ADF) hitherto boasted the lowest mortgage interest rates of 5.75 per cent, the market dynamics are all set to change with Tamweel and Lloyds TSB throwing down the gauntlet with their rates of 5.25 per cent and 5.49 per cent respectively. Flush with funds pumped in by Dubai Islamic Bank, which acquired a controlling stake in Tamweel, the Islamic home finance company has now opened up options to first-time borrowers and end-users, a breed nudged out of the market earlier.

"The type of customers who are looking to buy property has changed over the last few years. Customers interested in mortgages today are end-users," says Varun Sood, acting CEO, Tamweel. The new rate, however, depends on the customer profile and the down payment made. The finance tenor is for a maximum of 25 years while the finance-to-value ratio of 85 per cent is applicable to expatriates too. 

Focus on low-risk borrowers

In the quest to limit risk in their home finance portfolios, most mortgage lenders are targeting low-risk borrowers and completed property. ADF's CEO Philip Ward cites how mortgage enquiries have spiralled for apartments in the Al Bandar community in Al Raha Beach after unit handover in the last half of 2010. In Dubai, customer interest has hinged on units in mature communities with adequate supply.

"Demand depends on where there is readily available supply of property. The majority of Tamweel customers are from Dubai. But, the interest from Abu Dhabi, based on whatever new developments have been delivered, is strong," adds Varun.

Under construction property finance has also reduced to a trickle, given the anaemic end-user demand for off-plan sales. However, Abu Dhabi Commercial Bank (ADCB) continues to offer leverage to select developers to help milestone projects reach the finish line.

"In Abu Dhabi, we are a major partner in helping the development of key projects on Saadiyat Island, Reem Island and Al Raha Beach. While off-plan properties in the emirate have been experiencing severe stress in terms of end-user sale, we have continued financing them at reduced LTVs compared to completed properties," says Sundar Parthasarathy, executive vice-president and head of retail assets at ADCB.

The Tamweel chief adds that the company is also contemplating tie-ups with developers in future on projects facing imminent completion. 

Attractive mortgage terms

With more lenders in the fray, prospective home buyers can choose from a handful of competitive offerings. The maximum loan amount, tenure and LTV could be influenced by the client credentials, age and the developer involved. It also helps to have the salary transferred to the lending bank.

"We offer LTVs of up to 85 per cent and loan tenures of up to 30 years. We have a minimum salary requirement of Dh10,000 per month. If you are self-employed, you generally need to have been trading for a minimum of three years with two years' audited accounts. You will also need to show that you are drawing a salary that meets our minimum salary requirement. We also offer mortgages for non-residents, with a maximum LTV of 75 per cent," informs ADF's Philip.

Meanwhile, Tamweel's existing customers are now demanding that its promotional profit rate of 4.99 per cent be applicable to mortgages across the board. "It was a promotional rate applicable only to customers who procured finance from us in that specific timeframe. Contractually, the rate that's applicable for you is what you have contracted for. At the same time, we are mindful of customers who have a good record with us. On a selective basis, we have looked at revising their rates. This also depends on the equity in the property," elaborates Varun.

Given the large swathes of property defaulters, local lenders have had to resort to declaring several mortgages as non-performing and account for provisions, while launching proceedings to repossess those units. While Tamweel is negotiating with defaulting owners to meet their repayment obligations, it has chosen to foreclose on units where the owners have fled. "Wherever a customer is in the country, we prefer to work with them and offer solutions to keep them afloat and tide over the difficult times. There have only been a handful of foreclosures. These properties are in the process of execution at the court level. Once we get the court clearance, we will decide whether to put it up for auction or retain them," clarifies Tamweel's Varun.

Meanwhile, ADCB claims the proportion of defaulters in its home finance portfolio has not been significant. "To help customers avoid going delinquent, we have a customer service programme which caters to resolution of stress cases, with re-structure options if required," suggests Sundar. 

Moving off Eibor

Another issue dogging leveraged property purchasers is that lenders have moved off Eibor (Emirates inter-bank borrowed rate) and now use the internal base rate as a benchmark for calculating mortgage rates for variable rate loans. In several instances, not using Eibor has resulted in sharp increases in monthly payments without any warning.

"The interest rates are variable [mentioned in the mortgage agreement] and are linked to the bank's retail base rate [RBR]. While the margins are fixed for the entire tenure of the loan, the RBR is reviewed by the bank from time to time and depending on various criteria, including but not limited to liquidity in the market, cost of funds and/or deposit rates, it may vary subsequently. Such variation is communicated to customers and the terms of the mortgage agreement, in terms of monthly instalments and tenure, are amended accordingly," ADCB's Sundar justifies.

Capital trends 

"Until now, we have seen a lot of investors in the Abu Dhabi market. With the delivery of high-quality stock, we will see a significant shift towards owner-occupiers, as people living and working in the capital choose to put their annual housing allowance straight into a mortgage."
Philip Ward, CEO, Abu Dhabi Finance

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