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Financing real estate transactions became significantly challenging after the global credit crisis in 2008. Following the collapse of the credit markets, banks around the world tightened up on lending policies and reduced the maximum loan-to-value (LTV) ratios. Buyers are now required to put down larger deposits when buying homes. While this has minimal impact on most affluent or high -net-worth clients, the rule has hit the first-time buyer’s market hard.
In the UAE, the maximum LTV for expats is 75 per cent, considering that it is a first mortgage and the property is valued under Dh5 million. For purchases higher than Dh5 million, the LTV reduces to 65 per cent and 60 per cent for all subsequent purchases.
Therefore, a first-time buyer has to fund 25 per cent down payment and an estimated 7 per cent of the value of the property to cover all the fees for the transaction, a tough amount to swallow for many prospective buyers. What options does a buyer have to complete a purchase?
Using existing resources
If you have existing property in the UAE or overseas with little or no mortgage, you may be able to refinance and release cash (equity release) to fund your down payment. This is an excellent way of making your existing assets work harder for you. For example, if you have a property in the US, which is tenanted, you can secure a dollar or dirham mortgage up to 75 per cent of the value of the property and repatriate the funds to the UAE to use as a deposit. An additional UAE mortgage can then be taken against the new purchase, which is then funded by both the mortgages. This is acceptable, subject to the buyer’s affordability. However, check with your bank or mortgage consultant before taking this route.
“ Customers wishing to adopt this strategy should be mindful that some UAE banks and lenders will not accept equity released funds from an existing property as down payment, as these banks have interpreted the UAE Central Bank mortgage regulations differently to others,” says Jean-LucDesbois, Managing Director of Home Matters Mortgage Consultants.
Leveraging against investments or cash
This strategy is used by high-net-worth clients through private banking arrangements. Many ex-pats choose to maintain wealth offshore in financial services jurisdictions, such as Switzerland and the Channel Islands. While interest rates remain low, it can be beneficial to borrow against a portfolio of stocks and shares or bonds, which offers the potential to outperform the cost of borrowing. For example, a conservative investment portfolio may offer modest returns of 5-6 per cent per year, while borrowing costs are below 2 per cent.
Many expats also sign up to longer-term regular savings plans to maximise their offshore, non-tax status. These investment plans can also be used to borrow funds. LTV ratios against investment portfolios will depend on the underlying assets. Lower-risk investments, such as bonds or fixed-interest securities, will have higher LTVs than portfolios of emerging market shares, due to the volatility of the assets.
No personal loan for down payments
Following the UAE Central Bank regulations, neither banks nor borrowers should engage in providing or taking personal loans for down payments.
This is different from leveraging (borrowing) against an existing property, as personal loans are unsecured debt. This means there is no security or collateral used to ensure the loan is repaid. Due to the higher risks associated with personal loans, interest rates here are higher than mortgage rates.
Inflating purchase prices is a bad practice
Before greater regulation came into the market a minority of buyers, sellers and agents would create purchase contracts with inflated prices to gain higher loan amounts from the banks. This is fraud and there are several measures and checks these days to identify such practices. Banks will provide maximum LTVs on the purchase price or valuation, whichever is lower. Hence, there is no point in inflating a purchase price, as it will not value up and the bank would then lend on the lower amount.
Personal loans for paying purchase fees
Personal loans can be used to pay the estimated 7 per cent transaction or purchase costs. In Dubai, the costs of buying a freehold property are 2 per cent real estate broker fee, 4 per cent Dubai Land Department transfer fee, 0.25 per cent mortgage registration fee, and Dh4,000 registration trustee office and bank fees, which vary from bank to bank. These can be financed through personal loans, considering that a buyer is eligible and can make the down payment from the buyer’s savings. Several banks offer both mortgage and personal loan for fees these days but insist on a salary transfer. Again, some banks are averse to this and personal loans can be difficult to obtain, particularly if the applicant works for a small, unlisted company or is self-employed.
Gifts from parents or family
These can be used as down payment. However, banks will not accept loans (with interest or interest-free) from family. Most lenders will also ask for a letter from the family member and proof that the funds are not from a personal loan.
Source: Lynnette Abad, Special to Property Weekly