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You have a swish home with a view — a dream property you paid in cash, but it is expensive to maintain. Or you need to renovate your niche restaurant or upgrade your office equipment or company software. Is there a way to monetise your property and access some easy capital to beef up your enterprise? A home equity finance could be an unconventional but appropriate way to finance some of your projects.
An equity release solution allows you to use the equity in your home as collateral. If you have a property that is fully paid up, you can take advantage of your bank’s home equity release financing plans, which would enable you to cash out the value of your home and put it to good use.
In the UAE, home equity solutions have been on the rise since the rebound of the property market three years ago. In fact, in 2013 property prices had appreciated 30 per cent and above, creating additional equity in real estate assets. Although prices corrected by an average of 6 per cent last year, there was an increasing number of homeowners wanting to unlock funds from their units for further investment in different asset classes.
The home equity release business took off in a robust way, with the consolidation and stabilisation of the property market last year. It is now the main focus for banks, with portfolios making up nearly 30-40 per cent of overall home finance business.
Most banks in the UAE offer this unique financing that is gaining popularity among self-employed individuals as well as institutional investors. As property prices remain buoyant in the UAE, and with 70 per cent of transactions in cash, homeowners naturally want to unlock the monetary value of their assets - even as they hold on to ownership. Evidence suggests that entrepreneurs are increasingly funding their business expansion via this route as it is a cheap source of working capital, at profit rates that are at the lowest end of the market.
Institutional investors too are lining up to take advantage of their property portfolio to further fund their investments in the real estate sector or equity markets Banks look forward to stable growth in this client category, as they offer equity release solutions to those with fully owned properties. Noor Bank offers equity release based on current market price for properties that it has already financed under a top-up scheme.
Interestingly, in the UAE equity release financing is being taken for a range of purposes. Renovation, upgrades, extension of property, business expansion and real estate investments are some of the popular uses of equity funds, especially among salaried and self-employed individuals. If the funds are used to make significant improvements in existing property to increase its value, this financing method can be an appropriate one.
Equity release would also make sense for customers who are able to handle complex financing. You might consider consolidation of more expensive financing or credit-card debt by moving your entire portfolio on to home equity release finance, but make sure you are not simply transferring your debt from one set to another.
Access to funds
Accessing home equity release finance is simple, with the application process similar to routine home finance procedures. Banks would of course conduct an evaluation of the property to ascertain its finance-to-value (FTV) parameters. Once the process is complete, you have signed the offer and paid any arrangement fees that are required, the bank will conduct its own end of the process with the government statuary body — the land department. Then the bank can release the equity into your account. Payments are similar to a normal home finance with maximum tenor set for 20-25 years under UAE Central Bank regulations.
Most banks follow similar eligibility criteria for a client. Noor Bank requires a monthly income of Dh10,000 for salaried people and credits equivalent to Dh50,000 for the self-employed. Maximum finance amounts can vary between banks, but it is usually up to Dh10 million. Banks can release funds equivalent to 70 per cent of the property value and funding is available to UAE nationals and expatriates, both salaried and self-employed.
The property should be ready, with a title deed in the name of the client, ensuring that it is fully paid for, with no third-party attachments. The bank may reject any application for credit if potential clients do not meet this criteria. Banks such as Noor do not seek additional collateral, apart from property title in the bank’s name as the lessor and proper records with the registrar and developer.
The documentation for equity release finance is not complicated. Customers are required to present standard income documentation as well as bank statements for the purpose of debt burden assessment, and property documents proving ownership via title deed.
Make a smart choice
Acquiring financing against your home, however, should be a well-calibrated decision. It’s important to assess your overall assets and credit situation, your end-use requirement, ability to pay back and potential to create value in the process.
Prior to 2008, customers in the West were using their homes as a money box — drawing against the equity to fund vacations, make bigticket purchases, take other loans or for debt consolidation. This strategy seemed to work until home prices tanked, leaving many people with home equity loans or lines of credit they couldn’t afford to pay back. There is a lesson to be learnt from these experiences.
Homeowners need to know the current worth of their property and the trajectory of the real estate market. Since all banks will conduct stringent appraisal on your property, it is important to understand that FTV is an important metric. The appraisal will determine how much financing you can get on your asset, since UAE banks do not finance 100 per cent of the equity.
Banking costs and profit rates vary with every financial institution. While it is impossible to predict which way profit rates will go in the long term, it is important to get clarification about the costs and fees charged, including third-party fees that might be passed on to you. Customers also need to understand that their current financial situation will be a major factor in finance approval. They need to maintain a consistent employment history. Banks like a finance applicant who has verifiable income and has been working for the same employer or in the same profession for a reasonable length of time.
Home equity release finance can be a smart financial move that can solve a range of problems relating to either cheap capital or debt consolidation, provided customers adopt a mature understanding of the product. Prospective clients must pay attention to the state of the housing market, their real needs and ability to pay.
Source: Property Weekly