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Do you have home finance and wish to extract some advantage from the banking and property markets? If so, then switching banks may be an option for you.
Mature investors in the UAE are increasingly making use of the stabilised property market and low profit rates. More homeowners are now willing to change their finance plans and move to new banks that offer better deals. According to industry figures, the monthly ratio of buyouts at major banks in the UAE is around 18-25 per cent of the total new booking value. The switching option, however, is a tricky one.
As a customer, you must exercise caution and be exceptionally sure of your needs and numbers. Here's a step-by-step guide to the whys and hows of switching home finance.
Why do it?
The predominant reason for switching home finance plans is to secure a more benign instalment rate. If done wisely and at an appropriate time, it can help save a fair amount of money in the longer term.
Since competition is fierce in the UAE, finance providers are offering plans with special benefits in the hope of retaining customers and attracting new ones. It is up to the customer to remain alert of these developments and figure out how he or she can take advantage of the competitive environment.
Demanding customers often look beyond better rates and want schemes that offer additional facilities such as linked credit cards, takaful as well as financing for off plan projects.
Whether driven by choice or necessity, customers must base their decisions on how the property market performs going forward and how it will impact banking services and offers. Will competition among banks trigger a low-rate environment? Will this force banks to come up with attractive offerings and special incentives for customers?
For instance, there's demand for housing in Abu Dhabi, while Dubai is witnessing a slight decline in residential transactions. In both these situations, there is competition among banks to entice customers with lower rates and other frills.
However, customers should keep in mind that profit rates in the UAE have been relatively low and stable, currently around 3.5-4.5 per cent. So the question to ask is, what else can your bank come up with?
Give them a chance
Before reviewing the possibility of a shift, it is a good idea to contact your bank and see if it has any offers or alternative deals. A bank will, at times, reduce instalments for a good customer it is keen to retain. In the UAE, banks increasingly use various tools and negotiate to keep customers. This could be in the form of a fixed rate for a fixed period, or make scope for early settlement.
For example, there are special privileges offered for off-plan projects, particularly home developments that are still three to four years away from completion. Few banks offer home financing on offplan projects (Noor Bank is one of them).
The customer, therefore, has limited choice and sticking with a bank that does offer this option is a necessity. Moreover, it is very difficult to switch financing on off plan property.
Another incentive UAE banks provide is the facility of equity release after a period of six to 12 months. Noor Bank, for instance, has a provision to generate extra cash on top of the finance a customer has. The ability to raise equity from a home finance book is highly attractive to self-employed people.
Transparency is also an important part of customer retention and a key fact sheet will give holistic information to enable clients to compare features of each financing scheme, including profit rates and fees.
Switching home finances could potentially save you a few thousands in instalments, while allowing you to take advantage of special schemes. Usually, banks have entire teams dedicated to retaining customers, but if you are unable to get a discount to your satisfaction, it might be time to plan a move.
The cost of shifting banks
Crunch the numbers if your bank does not come up with a satisfactory scheme, or if you are confident that there is significant money to be saved by going through the hassle of shifting your books. But first, work out whether the savings outweigh the switching costs for your home finance. After zeroing in on a new bank that gives a clear idea of what the entry cost would be, get a full cost quote from your current bank. Add these two figures together. If the new entry costs and current costs are less than two years' worth of profit rate savings, then it could be worth switching to a low instalment scheme.
Ideally, the savings from the money you pay over your finance period should outweigh the discharge and entry costs within two years of the new financing to merit a switch. Unlike other countries, where exit fees can vary widely from zero to 5 per cent of the financing amount, in the UAE this is more transparent. If one is exiting before the tenor completion, early settlement fee is 1 per cent of the financing amount or Dh10,000, whichever is lower. This is laid down by the Central Bank.
As far as start-up fees or processing fees are concerned, it comes to 1 per cent of the financing amount. However, for switch cases or financing offered by the bank that the customer is transferring to, there are usually no fees.
Since the buyout market is hot, many banks do not charge any processing fee to entice more customers to switch to their home finance.
Buyout clients in the UAE should also keep in mind that they do not have to pay the entire 4 per cent title deed charges, but around Dh1,540 for the removal of mortgage and another 0.25 per cent to secure new mortgage on the property.
An instance of when it's difficult to switch is when your current finance-to-value (FTV) ratio is above 75 per cent. This means that your current finance outstanding should not exceed 75 per cent of the current market value of the property. The finance can only be bought out by a lender at a maximum FTV of 75 per cent in case of expatriates, and 80 per cent for UAE nationals.
The bottom-line is: switching home finance can save you money, but always check that the benefits, such as savings on equal monthly instalments, are worth the fees you'll be charged for leaving one scheme and taking up another.
* Before making a switch, compare the offerings of multiple banks and determine if you actually benefit.
* Shop around. See what finances are available from different credit providers. A comparison website will give an idea of what different banks are offering, or you could ask your bank for the services of an expert and a full fact sheet.
* Compare profit rates, fees and features. Once you have a shortlist of all financing options, draw up a table to compare the profit rates, fees and payment amounts.
* Make sure you check all the features to ensure you are getting what you want and will not be paying for the ones you don't need.
* Before you call your bank and try to negotiate a better deal, take some time to prepare yourself. Ideally, you want to find some deals being offered by other banks that you would be eligible for if you chose to switch.
Watch out for hidden costs
There are always some fees and charges associated with a ditch and-switch approach to refinancing. These could include:
* Discharge fees at your current bank
* Early exit fees at your current bank
* Application fees at the new bank
* Settlement fees at the new bank
* Valuation fees at the new bank
* Government mortgage discharge fees
* Property takaful fees
Source: Pawan Dhawan, Special to Property Weekly
The writer is Head of Property Finance at Noor Bank. Opinions expressed here are his own and do not reflect that of the bank