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UAE home financing explained

GN Focus gets experts from four leading banks to shed some light on mortgages in the UAE

Image Credit: Corbis
GN Focus

When it comes to buying a home many of us are in the dark about how and when to access the financing for it.   

Buying a home will typically be the most complicated series of processes we encounter, fraught with questions and quite commonly, cryptic answers. But the process shouldn’t be strenuous.

The first question is, what type of financing is available in the UAE? Rana Zeeshan Saleem, Head of Retail Assets, Emirates NBD, explains, “Conventional and Islamic are the two modes of financing available depending on the lender in the UAE. The majority of banks finance freehold properties with a title deed, while a few select lenders finance off-plan projects as well. The large local banks also finance self-builds for UAE nationals and second-degree mortgages for government housing schemes.”

Sundar Parthasarathy, Executive Vice-President, Head- Consumer Assets, ADCB Consumer Banking Group, says, “In traditional financing, lenders provide funds to borrowers to make a profit from the interest charged on the outstanding principal amount. Interest rates can be fixed or variable and payments are made over a fixed tenor by instalments. These instalments have two components — interest servicing and paying down the principal. Islamic financing is based on the principles of Sharia. It is based on the concept of buying something on the borrower’s behalf and selling it back to the borrower at a profit. This profit rate is defined in the contract and can be fixed or floating as well.”

Know your limits

Potential buyers should be sure of what they can afford both at the time of wanting to purchase and with consideration to the future. Most mortgage repayment lengths are 20 to 25 years and a lot can change within that time, so avoiding overleveraging should be the top priority. Parthasarathy recommends that buyers take an informed and comprehensive overview.

“Customers need to thoroughly evaluate their personal budgets, property options available for either self occupation or rental, long-term goals and competitive mortgage offerings. Other information to be considered is fixed or variable rates, down payment requirements, approval of projects by lenders, tenors, monthly mortgage payments based on amortisation and early settlement conditions.”

Given all of these considerations, what are the most important factors to consider when obtaining a mortgage and where should buyers start?

Swati Pant, Head of Mortgages, RakBank, advises looking carefully at the lender, as the relationship will probably be a long one. “It is important to choose a lender with which a good rapport can be established, since mortgages involve a long-term relationship that can last for up to 25 years. Borrowers should assess the bank’s accessibility, transparency, service quality, reputation, flexibility and length of experience in the mortgage market before making a decision. In addition, the borrower must always keep an open relationship with the bank and provide an accurate picture of income and financial commitments in order for the bank to develop a comfortable mortgage plan for the buyer. One thing that will need to be determined is the proportion of property cost that will be financed, known as Loan-to-Value or LTV.”

Following the worldwide property market collapse, the UAE’s banks are seeing an upturn. Mortgage options are being diversified again to apply to a greater variety of potential customers and the cost of borrowing is decreasing. Raman Muralidharan, Regional Head of Customer Value Management, Retail Banking and Wealth Management, HSBC, says, “The mortgage market has improved from a customer’s perspective. There are far more lenders offering competitive products, eager to grow their mortgage business. In the last year, we have seen a reduction in pricing, an increase in LTVs, a waiver of fees and other benefits. The Dubai Land Department has also opened various offices to facilitate larger transaction volumes and provide ease by eliminating appointments.”

Pant adds, “The mortgage market has been revived with the return of confidence in UAE real estate by both end users and investors. The availability of affordable home loans from the past year has been vital for recovery in the residential property market. In the past few months, RakBank has noticed an increase in volumes of mortgage lending and aggressive product offering by its competition hoping to acquire maximum market share.”

Pick the right rate

Another decision loaded with uncertainty will be choosing a fixed- or variable-rate deal. A fixed rate will give homebuyers the certainty that their monthly repayments will be the same for the length of the loan, but they may miss out on any potential savings if interest rates fall within that time. Saleem says, “Customers should take a view on their circumstances and choose their pricing accordingly. Longterm fixed rates are very popular in the market considering they cannot be increased prior to the completion of the fixed term. Adjustable rates pose the threat of increase, which can be challenging in terms of servicing and cost respectively.”

So whether purchasing a property as an investment or as a home, it shouldn’t be daunting. There are experienced mortgage teams at all of the UAE’s banks to help take buyers through the process.