Buying Property In Dubai and the UAE: Mortgage hurdles

Buying Property in DubaiImage Credit: Gulf News Archives

Buying property in Dubai, or your first home has become more difficult as new regulations on home loans from the UAE Central Bank came into effect. A substantially higher deposit is now required when securing a home loan, in accordance with the new regulations that restrict the amount mortgage applicants can borrow.

While the industry has welcomed the much-needed regulations, which aim to bring order to the UAE’s mortgage market and curb leveraged speculative property investment, industry experts say it has deterred prospective buyers who are struggling to pay the high deposit.

According to the new regulations, expatriates purchasing for the first time must put down 25 per cent for a property worth less than Dh5 million. UAE nationals need to pay 20 per cent for property under Dh5 million.

For property valued more than Dh5 million, expatriates need to pay a 35 per cent down payment and UAE nationals 30 per cent. Property bought off-plan requires a 50 per cent deposit for both expatriates and UAE nationals.

“The UAE Central Bank mortgage cap is a deterrent and it’s now more difficult to get a home loan because the required deposit is higher and most buyers are struggling to make this payment,” says Mario Volpi, Managing Director of Prestige Real Estate.

Volpi says many people are eager to buy, but purchasing property has become more prohibitive, especially for those looking for a villa. Although the majority of UAE buyers pay in cash, there are a significant number who can only purchase property through mortgage.

“I’ve seen a decrease in home loan applications due to the large deposit and fees — it’s a huge amount of cash,” says Volpi.

However, Shehzad Hameed, Head of Retail Banking Products—UAE, Middle East, North Africa and Pakistan at Standard Chartered Bank (SCB), believes first-time homebuyers are not seriously affected by down payments becoming 5-10 per cent higher.

“We do not see this impacting the majority of first-time homebuyers [and] we have not witnessed any significant drop in volumes,” says Hameed, who adds that first-time buyers are historically more willing to put in a higher down payment and are only marginally impacted by the change in the loan-to-value ratio. “Genuine new homebuyers are able to dig into their savings to bridge the gap due to the additional down payment requirement.”

For those who cannot afford the higher down payment, some lenders are offering personal loan options in addition to a 75 per cent mortgage loan, says Warren Philliskirk, Director at Mortgage International.

“Some lenders will loan you up to Dh200,000 interest-free, while others will offer a loan equal to 10 per cent of the purchase price, which helps with the down payment.”

Some companies, brokerages and banks may also waive processing fees or reduce their service fees depending on the deal, says Volpi.

“While the mortgage cap has imposed restrictions on home loans, it has also empowered the consumer,” says Philliskirk. “The mortgage cap prevents an overheating property market. There is currently a standstill in prices, with properties taking longer to sell.

“However, financed buyers are still in the minority — about 70 per cent of purchases are cash—and it’s not impacting the market drastically.”

Under new government regulations, property buyers also now have more flexibility to switch banks. In the past, banks charged break fees of around 3.5 per cent when a customer moves to another bank.

“With the newly implemented mortgage cap, the customer only pays a Dh10,000 fee and will no longer be stuck with a bank,” says Philliskirk.

Interest rates
With the decrease in home loan applications, banks have to work harder to offer competitive interest rates. They currently do not differentiate between first-time buyers and those who already own property, offering interest rates that start from around 3.99 per cent, says Philliskirk.

At SCB, first-time buyers can get a mortgage loan for a purchase transaction or an equity release for an unencumbered property, says Hameed. Customers can also transfer their existing loans with other lenders to SCB and avail of an equity release on top of that. The pricing is applicable to both UAE nationals and expatriates.

As of July, SCB offers a 3.49 per cent fixed interest for the first year for balance transfer transactions (loans transferred from other lenders to SCB) and 3.99 per cent for purchase, equity release and top-up transactions.

The bank finances completed property only and does not offer financing for off-plan property. Volpi points out that some banks are offering rates lower than 3.99 per cent, including a Qatari bank that currently offers 3.75 per cent fixed for two years. However, non-UAE residents could only secure an interest rate of about 6.5 per cent, unless they pay a 40 per cent cash down payment, in which case the interest rate would be 4.75 per cent.

Buying trends
The majority of mortgage applications are for property worth under Dh5 million, with the average home loan in the UAE currently around Dh1.7 million to Dh2 million, according to Philliskirk and Volpi.

Individuals buying property in Dubai specifically in Dubai Marina are likely to look for property with prices starting at Dh1.5 million, while families will be looking at property that start at around Dh3 million. Those looking for property worth more than Dh5 million are typically older couples who have lived abroad and want to stay in Dubai long term because of the high standard of living in the emirate, but don’t want to pay rent, says Philliskirk.

Hameed says there has been a marginal decline in mortgage applications for property worth more than Dh5 million and an increase in those valued below Dh5 million. This is true in both villa and apartment communities.

Volpi says it is a good time to buy, but also advises buyers to seek out motivated sellers who will seriously consider offers. “Some sellers in the market only want to sell at their price,” says Volpi.

According to a new market report from Asteco, the second quarter saw a continuation of the first-quarter slowdown in Dubai residential sales. The market witnessed marginal growth of 6 per cent and 3 per cent for apartments and villas respectively in the second quarter.

The report also observed a shift in property investment interest to peripheral communities, including Jumeirah Village, Dubai Sports City and Dubai Silicon Oasis, during the second quarter, as many prospective purchasers were priced out of more popular areas such as Downtown Dubai and Dubai Marina.

In Abu Dhabi, the average apartment sales prices increased by 4 per cent quarter-on-quarter and 29 per cent year-on-year, while villa sales prices remained relatively stable over the same period, showing an average increase of just 2 per cent. Average apartment rental rates ran in parallel with villas, recording modest growth rates of up to 8 per cent.

Source: Leigh Thomas, Special to Property Weekly


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