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Buying property using bank finance has become tighter over the past year, as property buyers have to deal with a new mortgage cap and higher transaction fees. Starting in September, the Al Etihad Credit Bureau has also been issuing consumer credit reports, but should homebuyers really be scared of this?
A credit report records an individual's debt obligations and payment behaviour for the past 24 months, helping financial institutions and banks access critical credit risk information and aiding clients in debt management.
Jaydeep Gupta, Head of Retail Clients at Standard Chartered UAE, says the first phase of the Al Etihad Credit Bureau will give banks access to customer exposure and repayment history. Within 12-18 months, it is anticipated that the bureau will release a scoring model.
''The bureau allows the banks to become more aware of the customer's debts, which in the current scenario is documented on disclosure basis,'' says Gupta. ''It also reveals repayment track record, which enables the bank to ascertain the overall credit rating of a client before extending any facilities.''
The initiative will have an impact on all consumer lending products.
''Lending will become more selective as it will be based on reliable information on a customer's financial situation and credit history,'' says Gupta. ''And the impact of this will be felt across the various lending products and not only mortgages.
''However, keeping in mind that the UAE property market is largely driven by cash buyers, we do not foresee any significant impact on the property market.''
Experts say the new mechanism, driven by guidelines from the UAE Central Bank, creates a new layer of protection for lenders, borrowers and the realty sector, benefiting all parties involved.
On the flip side
Mohammed Jamil Berro, Group CEO of Al Hilal Bank, says, ''The bureau definitely adds to the pressure, but we have to consider how this ultimately benefits both lenders and customers. Every lender wants to minimise bad debts, while every good customer wants to have a sound credit rating.
''The Al Etihad Credit Bureau is a tool ensuring lenders have minimum exposure to bad debts, while customers have good credit standing.''
The bureau ensures that all credit facilities are centrally monitored to determine how much each individual has borrowed. The bureau's reports will help banks make decisions when extending credit to a customer, ultimately contributing to a more stable economy free of bad debts, Berro says.
The policy changes introduced last year, i.e. the new mortgage cap requiring a higher down payment and an increase in transaction fees from 2 per cent to 4 per cent, have made it tougher to purchase property using bank finance. However, these measures have positively cooled the market and have prevented an excessive increase in prices that was evident last year.
Abdul Kadir, CEO of Ere Homes, says, ''The mortgage cap has led to a significant reduction in demand for midtier property valued between Dh3 million and Dh7 million due to a higher deposit. Also, the transfer fee increase has restricted speculators, as the margins of entry and exit has greatly reduced.''
Moreover, Kadir says the bureau helps banks reduce their provision against risky defaulters. Hence, most creditworthy bank customers will benefit as financing facilities should become easier for them, allowing the property market to cater to more financially stable clients.
Customers with good credit history will also benefit from better loan terms and interest rates, while bank clients with bad credit profiles could find it tougher and more expensive to acquire mortgage.
Those who want to avail of financing to purchase property could feel some pressure, says Yash Shah, Property Sales and Leasing Manager at SPF Realty, but screening customers will be for the overall benefit of the industry and the economy.
He says the Dubai property market does not need more speculators, but rather long-term investors and homebuyers, a goal the Al Etihad Credit Bureau can help achieve.
Certain consumers who have taken multiple lines of credit will find it more expensive and challenging to acquire bank finance due to a potentially unsatisfactory credit report. However, Warren Philliskirk, Director of Mortgage International, reveals the bureau can provide a copy of a borrower's report for a fee.
''There are timelines how long the information from the bureau goes back, so if clients had problems with missed payments or late payments then they do have the ability to improve their record over time by ensuring everything is maintained properly,'' says Philliskirk. ''Lenders currently only go back six months with salaried applications. With the bureau they will have the ability to look back over two years, so your payment records need to be clear and on time for this length of time.
''However, one late payment will not mean you will be declined automatically, but a repeated occurrence certainly would.''
Philliskirk also says the bureau will log every financial credit agreement a customer has made, which will allow lenders to determine if a client has defaulted on any loan or if there are inconsistencies in the overall payment history.
''Each lender will judge the information differently, but still within Central Bank regulations,'' says Philliskirk. ''The bureau does not provide any rating for individuals, just the information.
''Moreover, we do not see the bureau making any negative impact on the mortgage sector. In fact, streamlining the credit process for lenders will be a beneficial step.''
The bureau, however, will make it more difficult for those already overleveraged, forcing them to settle their liabilities, which could be achieved by cancelling or reducing their credit card limits or paying off loans.
With the real estate sector now back on the growth path, banks are aggressively luring buyers with attractive mortgage offers. Currently, the main focus has been on longer loan terms and lower fixed interest rates.
''The best two-year deal at the moment is 3.33 per cent and 3.79 per cent is the best three-year deal,'' says Philliskirk. ''This was huge around two or three years ago. Even at the peak of the property boom in 2007-08 lenders were charging 7-8 per cent, so current rates are less than half of that.
''Also, with the Central Bank capping the maximum break cost at Dh10,000, clients now have far better control after the initial fixed-rate period as there are no penalties of around 5 per cent as in the past. This means if the reversion rate being offered after the fixed-rate period expires, they can move or ideally just renegotiate with the existing lender to get a further fixed-rate deal.
''This is the way it works in mature markets and this is the way we feel it will evolve here in the UAE.''
Philliskirk also notes there are no indications interest rates in the local mortgage market will increase over the coming year.
''But nothing is certain,'' he says. ''Hence, we always recommend to our clients that they do not automatically opt for the cheapest one-year rate, but take a look at the bigger picture and secure a longer-term rate that provides additional security of payment.''
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Source: Hina Navin, Special to Property Weekly