Home financing: What should you factor in?

Buying property can be made a less stressful experience by picking the right mortgage optionsArshad Rana

The UAE provides a range of attractive real estate options, yet many residents remain wary of investing. Unpredictable markets, changing regulations and the personal conundrum between buying and renting continue to puzzle investors.

Selecting a suitable property in a high-supply market is the easier part of decision making. The real challenge starts with financial capability. Although a large number of investors in the UAE pay the full purchase price up front, this can be tough for others.

For this cross-section of homebuyers, home finance can be a convenient solution for acquiring property, regardless of whether they want a home to live in, or as an investment.

Whatever category you fall under, the advantages of home ownership are manifold. But homebuyers must keep three broad perspectives in mind when they weigh their options.

First, they should keep a keen eye on housing market trends and rental trajectories to spot a favourable cycle. Second, close scrutiny of regulatory and banking aspects can help get the best rates. And third, an assessment of one’s financial position and access to good professional advice will also help.

FACTOR IN Market cycles

Home financing applicants should focus on understanding the market cycle and not get carried away by hype, especially when purchasing for personal use.

Potential buyers could find it much more viable to invest this year, as the real estate market in the UAE is headed for stabilisation. After the bullish and speculative frenzy of 2013, there was a major shift in sentiment from the middle of last year. Government action cooled down property value growth and the wild rental market.

According to consultants JLL, Dubai saw a 53 per cent rise in property transactions in 2013, worth Dh236 billion, and an average 22 per cent growth in real estate prices. However, by the fourth quarter, there was a price drop of 5.2 per cent across the board. According to property consulting firm CBRE Middle East, a pipeline of 20,000 new units this year will add more balance to the sector.

Abu Dhabi will see a more gradual increase in prices, with new residential schemes and off-plan housing launches, and is unlikely to return to past inflation.

Like elsewhere, the rent factor in the UAE is a crucial trigger and individuals must take a call on this. From an end-user perspective, when rents go up, it makes financial sense to purchase property. There is little point in putting money into a landlord’s pocket. It’s better to own a property outright, and even if you have to get a mortgage, this will add to your equity.

Investor with benefits

For the investor, too, rising rents are an attractive source of income, especially in Abu Dhabi. According to JLL, rents in the capital over the past two years recorded a 20-25 per cent increase, while the capital is facing a housing shortage of more than 50,000 units, according to commercial real estate firm Colliers. Thus, Abu Dhabi rents are not falling any time soon.

In contrast, Dubai experienced modest growth of around 7 per cent last year, compared with 24 per cent in 2013, according to CBRE’s year-end market update. More than 20,000 new units are expected to enter the market during the next 12 months, which could have a
deflationary impact on sales and rental rates.

FACTOR IN Regulations and rates

In October 2013 the UAE Central Bank issued a new set of regulations to banks and financial institutions on financing. These regulations are applicable to conventional and Islamic banking

The new norms put a check on speculators and disciplined the overheated market of 2013. The practice of relentless flipping — where a property is sold soon after buying it, sometimes even before it is built or handed over—has been restricted to some extent. Potential buyers,
however, need to understand how these regulations will affect them.

Securing financing has become a little bit harder for UAE residents and expats due to mortgage caps. This has driven up the size of deposits needed to secure homes. A hike in transfer fees has also added to the cost of home sales. (See Box 1)

Instalment issue

The most crucial aspect of home financing is the instalment regime and the direction it is likely to head in. Banking experts indicate that the days of low instalments are almost over and we can expect rates to slowly start going up from this year onwards. It therefore pays to plan ahead for higher financing costs.

In fact, there has been a trend among customers to protect themselves against an early rate hike, and they are ready to pay a little extra for the security of a fixed rate. Home investors should keep in mind that there is now a whole range of financing available at reducing rates of less than 4 per cent in the UAE.

Nonetheless, it is a good idea to consult your bank financing manager before selecting an option that best suits your pocket. (See Box 2).

FACTOR IN Personal preference

Once the market trends and home-financing options are clear to you, it is time to get down to the nittygritty. In a scenario where supply outstrips demand, an agile customer should seek out banks that offer simple yet attractive financing schemes.

Attractive schemes: As transaction volumes went down last year, financiers tried to entice customers with friendlier schemes and low rates. There are schemes that provide customers with large equity (or little debt) against their property. Customers are also given the opportunity to release some of the collateral in return for a monthly payment.

Developers with upcoming off-plan launches are also trying to ease the entry of potential buyers into the market. New launches stand a better chance of finding buyers if developers limit the upfront payments and make sure the rest of the payments come after completion.

This way, buyers stand a better chance of getting financing facility from banks in the current market situation. And if the bulk of the payments are staggered after completion, buyers can even get pre-approvals for the project to be treated as a completed one.

Financing guidance: With around 20 odd banks in the UAE combining for more than 100 financing products, the customers’ choices are relatively extensive.

While customers conduct their own due diligence, it is prudent to seek advice from the home-financing manager at the bank. Banks usually try to support their customers by assessing their financial health and will judge if they are in a position to meet payment
obligations regularly.

Personal feasibility: Finally, it all boils down to your personal requirements, affordability and choice. For instance, if you don’t hold a medium- to long-term view on your property and are not planning to retain it for long, then home financing might not be the best option for you. You should also decide if you can afford to make regular payments to the bank as monthly instalments towards your home finance.

Typically home financing can be a good option for those who have a stable income from work or business and are looking to minimise expenses that are otherwise spent on rent.

Buying the Sharia way:

* A number of banks in the UAE offer a variety of conventional and Sharia-compliant solutions to suit the financing needs of homeowners.

* Islamic products are generally asset-backed, instead of mere IOUs. As Islamic financing prohibits interest and speculation, the bank purchases a property from the developer/owner and leases it out to the customer. The customer pays monthly instalments in the form of fixed
rental, variable rental and/or advanced rental.

* The bank also promises to transfer or sell the property to the customer at the end of the lease term or at any point of time, at a price to be calculated using an agreed formula.

* Islamic financing ensures that the profit rate formula is agreed up front for the full tenure between the bank and customer. These rates are not subject to change under any circumstances, unless agreed by both parties. The bank’s margin is fixed for the entire tenor from the first year onwards.

* Islamic home finance also has a risk-sharing aspect. If your property is beset by unforeseen circumstances that render it uninhabitable, any rental payments will be suspended until the damage is repaired, which can be of great help to anyone during this difficult period.

Source: Arshad Rana, Special to PW

Arshad Rana is Head of Portfolio and Channel Relationships at Noor Bank.


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