This week's launch of the Amlak Bonus equity release finance scheme is just another step on the road towards a more developed mortgage market in Dubai. From just one lender three years ago, there are now 12 banks offering finance on Dubai property.
Amlak was the first lender in the market and has led the market with new products ever since. Its new Amlak Bonus plan allows existing borrowers to borrow against the increased value of equity in their home, and for 100% owners to borrow against their existing home at a current valuation.
Equity release loans have become common in places like the US and UK, but are new to the Dubai property market. They have also been criticized for encouraging a culture of borrowing that sees a home as a kind of ATM to be tapped for any expense.
It is true that mortgage borrowing should not be used to fund annual expenses like holidays or to buy cars. For when repaid over 15 to 25 years that makes for an extraordinarily expensive holiday or new car.
Funding home improvements
However, for property improvements or for funding the purchase of additional properties then equity release loans can be very convenient. Adding a new kitchen or bathroom can add to the equity value of a villa or apartment, while also providing a new facility for the owners. Marble floors would do the same.
Similarly if the owners want to buy an investment property at some stage – perhaps when the supply of apartments temporarily depresses the market at some time in the future – then having an equity loan available could be very useful. In particular, it may not be possible to raise a mortgage quickly to buy a distressed property at a bargain price, while the equity release loan against an existing mortgaged-property should be much easier to obtain.
Not that the Dubai property market is presently short of mortgage options with 12 lenders listed in MoneyWorks magazine with variable rates from 6.75% over up to 25 years for expatriates and nationals. But equity release does add to the range of mortgage options, as it allows owners to realize the capital appreciation in their property without having to actually sell it.
Your home at risk
Of course, you will still have to meet the monthly payments on any money borrowed against your home, and your home is at risk if you do not keep up your repayments.
However, if used intelligently the home equity loan is a flexible and efficient way to borrow to fund the acquisition of property assets or their improvement. But that should be the rule, only borrow against your home for property investment.
On the other hand, if refinancing allows other debts to be settled without having to sell a home, this can also be a very useful facility. Mortgage debt also tends to come with the lowest rates of interest which is important in debt refinancing.