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Then the payout will be equal to 100% of capital invested, plus the performance of the basket of stocks which has a maximum profit capped of 27%.
HSBC capital protected notes are a well respected and popular investment, particularly among nationals and expatriates looking for a higher return than a deposit account with no capital risk. The note achieves this result by investing most of the funds in almost risk free treasury bonds and the balance, which would normally be paid as interest, goes into a more risky, high-return asset class.
Home loan security
The maximum return cap of 27% in the case of these notes suggests the bank expects strong performance, but this part is not guaranteed. However, what is interesting to prospective home loans is that these notes can be used as security for home loans that are cheaper than normal mortgage rates, a highly competitive 5%.
Investors in these notes should, therefore, win twice over if they use the notes as security for a home loan: first on the investment return from the note itself; and secondly from the lower cost of home finance.
This is just the latest example of how ultra-low US interest rates, now down to 2.25%, are finding their way into the UAE housing market. So far mortgage firms and banks have been reluctant to pass on falling local discount rates to home loan customers.
In a sellers' market, with people desperate to secure home funding, they argue there is no incentive to lower their rates. But market forces do always drive participants towards lower costs.
Competition hotter
The Commercial Bank of Dubai has rapidly become the UAE's third bank for mortgage lending with its risk-based pricing model since its launch only last December. And customers have been attracted to Lloyds TSB's dollar-based mortgage product for UAE property, offering a double-bonus in the event of revaluation (provided your wage is not paid in dirhams or your equity is based in a foreign currency).
Omniyat Holdings announced this week that it is to launch a $1bn Islamic mortgage finance company later this year or early next. It will become the UAE's 24th mortgage lender, and increase competition.
The clever home buyer will always seek out the lowest cost of funds for highest total gains. Even a fraction of a percentage point off the cost of a loan over a number of years can considerably boost the total internal rate of return on this investment. It is well worth the time and effort spent securing the best deal.
See also:
Shariah-compliant hotels rise in the Gulf
Working With Islamic Finance
Peter J. Cooper
