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28 March 2024

Weigh your capacity to avert home loan defaults

Home loan experts advise customers to have a long-term investment strategy in place while buying a properrty. (EB FILE)

Published
By Sunil Kumar Singh

Many prospective homebuyers choose to avail a home loan to own their dream property. But taking a home loan involves a long-term assessment of your repayment capability and due diligence, without which things might lead to problems such as loan defaults.

So, how to get the most from your home loan and what are the safer ways to avoid home loan defaults?

"Prepare for the worst that might happen and create an emergency fund of, at least, six months' income so that you can weather the storm if you lose your work or get sick," says Steve Gregory, Managing Partner, Holborn Assets, Dubai. He says one can also look to buy a distressed sale property from someone who is already facing difficulties, as you may buy at a lower price and thereby own something worth more than you paid for, should things go wrong.

"Avoid the risk of defaulting by being strictly honest with the lender on your mortgage application. Never borrow a deposit – if you have not saved a deposit, you cannot afford a mortgage. Do not buy a property for someone else. Often children are asked to sign for parents who are too old to qualify, but this is very dangerous to parents and children," Gregory adds.

Prospective homebuyers must shop around to ensure they are getting the best deal on their mortgage agreement. Before finalising the agreement it is essential that a customer pays special attention to the terms of finance. "Take time to know the terminology, types of mortgages being offered and how these options fit with your financial plans. Assess clearly how much you need to borrow and the maximum monthly payment you can afford. If you feel unsure about your financial situation or mortgage needs, seek advice and assistance from your mortgage advisor," say officials from the personal banking department of HSBC, UAE.

Another key point to consider is the penalty clauses of the mortgage agreement. Loan seekers need to be aware of penalties that will be levied in case of early payments, missed payments as well as when exiting the loan, they added.

Contact with lender

Experts advise home loan borrowers to immediately get in touch wtih their lender if they face any problem related to repayment.

"The first thing a client should do if they feel they are about to default on their mortgage is to contact the lender. Never ever, ignore the problem. The banks will have a dedicated collections team in place to deal with such issues," says Aimee Garraway, Advisor, John Charcol Middle East.

The action taken by bank will depend on the reasons as to why a client may have defaulted. "The banks do not want the issue of having a large number of customers in a default position… if they can help the customer by arranging a payment plan, then they will do so. However, the actions taken are depend on the individual bank," she says.

A number of external factors and circumstances can lead to a customer suffering financial hardships. Therefore it is important to choose your financier carefully. When a customer finds himself in difficulty, he/she should speak to the financier to consider the available options. A number of finance companies offer the facilities of payment holidays, reduced mortgage payments for a time or the option of refinancing over a longer time period to reduce monthly payments. The key is to inform the mortgage company as soon as you become aware of this situation, and work with them to find a solution, HSBC officials said.

Thorough research needed

Experts add that a customer needs to calculate exactly how much he can afford to borrow and then take informed decisions and borrow wisely. One should ensure that the property they are planning to purchase would be financed by lenders. "Banks normally consider the customer profile (income, employment details etc) and property profile (project, developer, apartment/villa etc) to underwrite a customer and arrive at the loan amount to be sanctioned," says Vikram Krishna, Head Retail Loans, Emirates NBD. Much of the capability to repay home loan and getting the best from it comes down to due diligence by the borrower as well, experts say.

It really comes down to due diligence and completing thorough research to ensure that the product you are buying is exactly what you want it to be. "A buyer needs to know whether it is a completed property or off-plan. If it is off-plan at what stage of construction is the unit, and when will it complete? Has the developer completed developments before, and if so were they to the standard and on time? These are crucial points a homebuyer must keep in mind," says Matthew Green, Head of Research & Consultancy UAE, CB Richard Ellis Middle East.

Additionally, he says, buyers need to be realistic in terms of what they are capable of re-paying on a monthly basis. Based on international standards, housing expenditure should typically comprise no more than a third of the monthly income to remain affordable.

Where possible, the purchaser should also have a long-term investment strategy in place, and should avoid the speculative model of short-term gambles on capital value growth, says Green.

However, should a home loan seeker go to a bank/financing institution, which offers a low interest rate and higher loan to value, or should he approach one that offers lower loan prepayment charges and low loan processing fees? It very much depends on the status of the individual homebuyer, say experts.

For those with minimal capital to play with, they may require a mortgage with a lower initial down payment, but with a higher headline interest rate over the loan period, says Green.

An individual needs to determine the optimum level of down-payment versus financing, with the bank's guidance, in order to manage all financial obligations comfortably, say experts.

Today, with considerably more attractive price tags being promoted, many investors are seeing a window of opportunity to acquire the dream homes they have always wanted. However, committing to a 15 to 25 years tenure is a step that should be carefully looked at before the decision is made. Because a longer tenure means lower monthly mortgage instalments, many prefer the longest tenure possible to make monthly payments more manageable. "To decide on a suitable tenure, and to avoid defaults, buyers should determine a monthly installment amount they can comfortably pay along with their other financial obligations," says Kunal Mehta, Head of Mortgages, Rakbank.

The level of financing offered for a property, indicated by the LTV (loan to value), varies from one bank to another, with most mortgage providers offering finance ranging between 70 per cent and 80 per cent of overall property cost. Since this level can also vary within a bank depending on the selected property and its developer, buyers must first verify with the lender the LTV corresponding to the specific project they want to purchase, he added.

Is loan refinance an option?

Experts believe that a borrower can opt to refinance his home loan, but he should bear in mind that it comes at a cost.

A lot of new deals are coming up into the market and previous deals may not be as competitive now. However, the client needs to bear in mind the costs to refinance. Refinance rates can be obtained from as low as 6.5 per cent. We are seeing a number of clients transferring from rates as high as 9.5 per cent so the lower rate benefits them greatly. However, when advising clients on whether refinance is the right option for them, the key factor to take into account are the penalties they will face with their current lender, says Aimee Garraway, Advisor, John Charcol Middle East.

Some lenders will charge a client as high as five per cent for moving their mortgage to an alternative lender. If a client has an outstanding mortgage of Dh2,000,000, the penalty for transferring could be as high as Dh100,000, which makes moving to lower rate ineffective, she adds. If your mortgage needs to be altered, this is called refinancing. This can happen for a number of reasons not solely that the loan term or payment needs to be altered due to a change in circumstances. This can also happen if you wish to change mortgage providers, or should the value of your property increase sufficiently to allow you to take additional finance against the security of your house for a separate purchase, officials from HSBC said.

As purchasing a property is usually one of the largest financial commitments which a person undertakes, and is also said to be one of the most stressful, it is highly recommended that additional peace of mind be sought by ensuring that the loan and property are adequately insured. For a small additional premium both the property and the owners can be protected in the event of any unfortunate circumstances.

However, for any related buildings or contents cover, it is important that a professional valuation be undertaken to ensure that the correct building insurance amount is taken. This will ensure that the dependents will be would be protected in any unfortunate eventuality.