Getting a mortgage

We asked Damien Hitchen, Regional Mortgage Expert and Managing Director of Gulf Lenders Network, how buyers should go about getting a mortgage in the UAE, and what pitfalls to look out for.

Which are the main banks offering mortgages, the type of rates and repayment periods you can expect, and what the different types of mortgages are that will be on offer?

There are currently 23 lenders offering home finance to individuals and companies in the UAE market. This number has grown substantially in the four years since the inception of the freehold property market in 2002.

There were an increasing number of new entrants in 2006 and 2007, with further entries scheduled. The market providers are split between international lenders, such as HSBC, Barclays, Lloyds and Standard Chartered, and domestic banks and finance companies, such as Amlak, Tamweel and Dubai Bank.

Mortgage lending is widespread, and market estimates from the UAE Central Bank suggest that at 30 June 2007, a figure of Dhs50bn has been leant collectively by the various Lenders in respect of home finance.

In terms of products, the market has been largely characterised by basic mortgage products, with the majority of lenders providing “vanilla” variable rate, capital repayment loans – this is essentially the safest type of product from a lender perspective.

However, in 2006, we saw some level of product differentiation with the arrival of an Offset Mortgage from NBD, interest-only and multi-currency options from Lloyds and Barclays, and regular ‘special offers’ from lenders, such as Dubai Islamic Bank’s latest 95 per cent loan-to-value, with a fixed profit rate of 6.40 per cent for two years for customers looking to purchase The Lakes properties at Emaar.

Hitchen explained: “Whilst the market is by no-means comparable with western mature markets, things are improving for the consumer. It is expected that competition will increase, and, as a result, drive product differentiation and options to the market. Due to the level of options in the market, consumers would be best advised to speak with a professional mortgage broker to explore all of their finance options before they purchase – as you would in any mature market.”

Interest rates

In respect of interest rates, these vary from introductory/fixed term offers from 6.40 per cent per annum, up to rates in excess of 9.50 per cent.

However, the market ‘norm’ rates would lie somewhere between eight and 8.50 per cent per annum at this time. This is extremely high compared to mature markets. The rationale for these rates is the lack of a legal and regulatory framework in the market, combined with the lack of a precedent for re-possession if a borrower defaults.

However, as the legal framework continues to develop and as competition increases, there is expected to be a trend towards dropping rates going forward. In mature markets, lenders typically work on ‘margins [profit]’ on their portfolio of between 0.25 to 0.75 per cent, whereas currently in the UAE this average around 2.75 to 3.50 per cent. This is certainly excellent business for UAE based lenders at present.

What are the UAE laws that couples/single, unmarried/married people should be aware of, eg, next of kin rules if the male dies; what women get; whether unmarried females can't be named owners on the mortgage with their male partners?

There can be issues that consumers need to be mindful of when making a finance application. Certain Lenders, mainly the Islamically compliant providers, will not accept applications from ‘un-related parties’. For example, from a male/female un-married applicant, or if two non-related friends wished to apply for finance, some Islamic lenders will not accept this.

For the majority of lenders in the market this is not a problem, neither is it for the majority of developers or at the Dubai Land Department (DLD). DLD, which registers title to a property in the names of the purchasers, do not require the parties to be married or related. This is consistent with most mature markets, where if you can afford the property purchase, anyone can own a property.

What are the rule differences between the emirates?

Although there is development across the UAE from Abu Dhabi to Ras Al Khaimah, more than 95 per cent of market activity is concentrated on the Dubai market. Each Emirate has its own legal and judicial systems, Land Registry departments, and rules and regulations as to who can buy, and on what basis.

This in mind, you need to take professional advice from a real estate broker, a finance broker or from the Developer when considering a purchase. Whilst there is a federal law underpinning real estate transactions in the UAE, practically, at present, it has been left to the discretion of the individual emirate to decide their own framework and proposition to the market.

Five top tips when buying a property

1 Speak to an independent mortgage broker for a professional view on all of your lending options – there is no reason to limit yourself to your bank or one or two lenders. Let a mortgage broker review your personal circumstances and recommend the most appropriate lender for your purchase.

2 Obtain a pre-approval before you buy. This way you will have a budget to work with that is affordable, and you will be able to make the purchase via a deposit when you have identified your property. If you proceed in placing a deposit without arranging finance, you may not be able to secure the finance you require, which in the worst case can lead to a loss of your deposit if you cannot complete the sale.

3 Check with your mortgage broker, the developer of the project or your real estate broker as to who actually provides finance for the property you have selected. It is not unusual for developers or projects to have limited finance or no finance available at all. If you are looking for finance on a purchase, this can dramatically effect your decision on a given home or investment.

4 If you have multiple options when looking for finance, don’t simply concentrate on the interest rate (called the profit rate in Islamic finance). This is an important consideration, however the principle areas to focus on in the UAE market are [i] how much of my income will the lender consider in my application [ii] what is the loan-to-value [LTV] the lender is offering. These two points basically provide you with your finance eligibility for your purchase. Some lenders may have low rates, but do not consider items such as variable bonuses or commissions, and therefore the rate is largely irrelevant if you cannot get the amount you require on the property. Your professional mortgage broker, with detailed knowledge of the credit policies of the lenders, will be able to walk you through this analysis, and recommend an appropriate lender.

5 Do not over-stretch yourself. You should be aware that in addition to the deposit you must pay to make up the difference between the purchase price and your loan, that there are material fees that you will incur when purchasing a property in the emirates. Lenders fees, developers fees, real estate broker fees can typically add up to five per cent on your purchase price, so make sure you have this available, otherwise you could face trouble in the settlement of your property.