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Earlier this year, the Dubai Municipality allocated around 100 hectares of land for affordable housing, which it defines as ''living space for those earning between Dh3,000 to Dh10,000'' per month. This is a guideline for developers focusing on this segment, but not enforced by the government in its current form.
While the stabilising residential market over the last two quarters is helping end users move towards becoming homeowners, the introduction of tighter mortgage limits last October and doubling of registration fees are pushing buyers to look at financing options to take the deal forward. As per a financial report issued by the Real Estate Research and Studies Department, mortgage transactions overtook cash transactions during the first half of the year, accounting for Dh65 billion. However, mortgage options for those in the salary bracket laid out by the municipality are limited.
Existing mortgage plans
''Three banks provide mortgage to customers with salaries below Dh10,000 — Noor Bank, ADIB and Standard Chartered,'' says Yazad Hodiwalla, a Senior Mortgage Advisor with a leading bank in the region. ''Like all banks, they work with a list of employees and the category they fall in. Most other banks have salary requirements starting at Dh15,000 and it can go as high as Dh25,000 for expatriates and Dh20,000 for Emiratis. For those earning below Dh8,000, taking a mortgage means getting a personal loan, although for married couples some banks allow both spouses' salaries to be combined to reach the minimum requirement (each should earn at least Dh8,000).
If the salary carries a variable component, banks could also make an exception. Mortgage advisers also say there are cases wherein some people who fail to meet the salary requirement were able to apply for mortgages after liquidating real estate assets in their home countries.
Mortgage aggregator website MoneyCamel.com reveals that only Emirates Islamic Bank offers mortgage for those with a salary of not more than Dh8,000, but the facility is only available to UAE nationals. The bank offers mortgage an interest rate of 4.99 per cent per year and maximum loan-to-value (LTV) ratio of 80 per cent and maximum loan amount of Dh5 million. At this price, options in areas such as Silicon Oasis, Meadows, Arabian Ranches are available for sale.
According to Hodiwalla, the slew of charges to be paid upfront or throughout the payment cycle is a key inhibiting factor for most potential borrowers. ''Every bank charges a processing fee, generally priced at 1 per cent of the loan value and property valuation fee of Dh2,500-Dh3,500 per property,'' says Hodiwalla. ''The loan amount is derived on this evaluated amount or MOU/SPA value, whichever is lower. Valuation fee may vary based on size of the property — [and is] different for buildings, multiple-storey villas, multiple units, full floor, etc. It also includes life insurance, where the bank is the beneficiary, ranging from 0.35-0.45 per cent charged annually on the loan amount outstanding, and property insurance ranging from 0.045-0.05 per cent charged annually on the value of the property, where the bank is the beneficiary.''
The size of deposits need has gone up pushing households to save for longer before transitioning out of a rented home. With the minimum salary requirements of mortgage structures being around Dh15,000, experts point towards a gap in the market in terms of viable financing for affordable housing.
For instance, a one-bedroom apartment in Remraam, Dubailand, is up for sale for Dh770,000. The down payment would be Dh192,500 and equated monthly instalments (EMIs) of about Dh3,016 for a 25-year mortgage at an interest rate of 3.9 per cent. The cost per month would be about 38 per cent of the monthly salary for someone earning Dh8,000. Banks usually restrict EMI to 40 per cent of monthly gross income. However, experts advise to not stretch oneself thin and instead go for an EMI that enables at least 15 per cent of the salary to be set aside as savings.
Getting the best deal
Experts suggest getting mortgage preapproval before looking for a suitable property. Once preapproved, a borrower would know the maximum amount that can be borrowed, which will help narrow down the buying options.
There are a slew of aggregator websites such as Mortgagefinder, MoneyCamel and Souqalmal that allow comparison between loans on offer by various banks. These websites also offer a digital calculator to assess mortgage costs based on salary details. It is also possible to hire a certified mortgage broker to do the legwork. In addition, negotiating is part of ensuring a good deal, alongside keeping a tab on the ancillary costs involved.
Also, while it might be tempting to go for the lowest possible interest rate, borrowers should note that some advertised rates may be fixed for only a short period of time. ''Banks offer lower introductory rates to attract the potential customers and these range from 2.9-3.5 per cent per year for the first year or first two years,'' says Hodiwalla, who has been handling mortgages for the last eight years. ''After completing 12 or 24 EMIs, banks either have rates based on EIBOR [Emirates Inter Bank Offered Rate] or have their own base rates plus margins, which is made clear to the customer on day one.'' Hodiwalla says the base rates range from 4-6 per cent depending on the product offering, type of property, customer profile and LTV.
''I would urge young and new investors to plan and have reserve cash of approximately 34 per cent of the property value, even though banks offer to finance 75 per cent of the property value,'' advises Hodiwalla.
It is therefore important to evaluate the variable rate, which includes base rate and margin, as this is likely to be incurred after the fixed period.
Another factor that could affect buyers looking for mortgage is their credit history, which is now monitored by the newly formed Al Etihad Credit Bureau (AECB). ''There are 56 data providers and 52 subscribers. Almost all leading financial institutions in the UAE rely on the credit reports provided by the bureau and use the services on a regular basis as a reference point when analysing credit applications from consumers and corporates,'' says a spokesperson for the bureau. ''Individuals can request their short credit report for Dh70 to give them a clear picture of their financial obligations and debt levels.''
Banks consider AECB a welcome step. ''It is beneficial for banks to have a clear picture about the applicant's financial profile,'' explains Hodiwalla.
The affordable segment
Developers such as Nshama and MAG have begun offering products to the mid income segment through the TownSquare and Boulevard community projects respectively. Nshama is currently offering three- and four bedroom homes starting at Dh999,888 and has joined hands with Noor Bank, First Gulf Bank and ADIB to offer home finance services. Fred Durie, CEO of Nshama, says, ''This project [Zahra in TownSquare] has been launched after careful market evaluation; we have identified a strong need from a large segment of the population, who aspire to be homeowners.''
MAG Boulevard, on the other hand, is an integrated community at Dubai South offering developer financing with prices starting at Dh520,000.
According to a study released by Colliers International in November 2014, 50 per cent of Dubai households earn between Dh9,000 to Dh15,000 per month. Following internationally accepted standards of what a household can afford to spend every month on accommodation, this limits rental or mortgage repayments to Dh32,500-Dh54,000 per annum.
''When we talk about affordable housing in Dubai we are not referring to low income housing, but rather housing that is affordable for a household in relation to its income,'' explains Ian Albert, Regional Director at Colliers International. ''In the Dubai market [this points to] midmarket properties that are suitable for young working families or professionals. Owing to the recent growth in rental and sales prices in Dubai, this market segment has chosen to live in neighbouring emirates such as Sharjah and Ajman where greater options are available to them.''
Nearly 31 banks actively lend in the Dubai market today and most offer competitive products with greater transparency. According to the Dubai Mortgage Market Update and Opportunities Q1 2015 released by mortgage consultants Home Matters, 2015 is set to be a challenging year for the UAE mortgage market, with most banks committed to higher targets and property transactions continuing to slow. ''This will provide prospective buyers and existing borrowers with better lending opportunities as the banks battle over a smaller pool of business,'' the report states.
''As competition among banks intensifies, consumers can expect lower interest rates and greater transparency in mortgage products. The UAE Central Bank mortgage regulation has also had a positive impact in softening house prices and most banks have standardised exit fees at 1 per cent [or a maximum Dh10,000] for early settlement of loans. Existing borrowers now have greater flexibility than in the past, where excessive penalties minimised the opportunity of securing better terms elsewhere.''
According to Richard Paul, Director-UAE Residential Valuations at Cluttons, whose team is on a panel of 30 regional banks for mortgage valuations, there is no easy solution to the affordable housing issue. ''Banks are restricted on lending by the Central Bank, and these are necessary measures to control individual lending, especially in light of the recession of 2008-09,'' says Paul. ''Affordable housing requires different ideas to be tested. In markets like the UK the planning department has asked developers to build a section of their plan as affordable housing, essentially subsidising built cost with the product being sold only to a certain demographic. Even rent-to-buy schemes have allowed people from lower income groups to become homeowners.''
Meanwhile, any significant changes in the lending policies for lower-income groups are unlikely unless there is a sector-wide policy is introduced. ''Banks are pessimistic about 'budget' properties, so financing to a potential customer buying these properties remains questionable in their books,'' says Hodiwalla. ''Also, the lower-income segment falls under the high-risk profile. So developers and banks will have to work in tandem to develop this segment. The product offerings should be relaxed with lower interest rates and higher LTV ratios for this segment. Financial institutions will never compromise when it comes to lending to a high-risk customer, unless government [introduces] reforms or the Central Bank makes it mandatory for banks to have a tailor-made product for budget properties.''.
Source: Manika Dhama, Special to Property Weekly