In the year to September 2006 total home loans granted in the UAE stood at only $7.4 billion and represented just 7.7 per cent of total private sector lending, according to the latest Central Bank data. But the home loans sector is poised for massive growth over the next couple of years as Dubai real estate projects are completed and end-users take up loans to buy them.
Potential mortgage holders now have quite a range of choice with around 10 banks providing different Islamic and traditional mortgages. The focus for many people will be obtaining the lowest cost of monthly payments, and that will mean a mortgage of long tenure, possibly with a mechanism to deliver lower payments in the early years.
There are many things to consider when taking out a mortgage, and the most obvious is what you can afford in payments. However, something that many home owners overlook are any penalties paid for early repayment. After all when you are moving into a house leaving it is not the thing uppermost in your mind.
But many buyers will be expatriates whose contracts may expire in three or five years, and when it comes to the time to leave Dubai they may well decide to sell-up and buy elsewhere. Not many people can raise more than one large mortgage for a family home, and so their principal debt will have to stay with the principal residence. Alternatively you could come into some money and want to pay off your mortgage.
This is the point at which you might wish that you had chosen an international mortgage company, like HSBC or Lloyds TSB, over a local firm like Amlak Finance or Tamweel.
The Amlak Finance early redemption charge is currently 1.5 per cent and is applied even to early borrowers whose mortgage agreement explicitly states that such a charge will never be introduced.
Tamweel is vaguer in its policy, and its website says: 'As this is a Sharia'a compliant offer, you do not have to pay penal charges for prepayment - only a charge based on the actual prepayment cost will be payable by you.' It is therefore not clear what the charge will be, but there will be one.
From the mortgage lenders viewpoint the argument is that early repayment upsets the profit calculation on which its lending is based, and they feel entitled to compensation for lost business. But equally the local firms are now in danger of losing new mortgage business to the international companies that do not impose such charges.
The larger international banks realize that in the swings and roundabouts of lending that what you loose on an early redemption of a mortgage will probably be more than compensated for by goodwill when the customer does his or her next, and probably bigger, mortgage deal.
Perhaps the smaller Dubai based lenders should be more competitive and show greater self confidence in their approach. Otherwise they will continue to loose some of their best potential customers before they walk in the door.