Drop in fees makes Islamic mortgage attractive option

The Land Department has drastically slashed its charges on Islamic mortgages on completed projects. This will make the Islamic option much more attractive than conventional offerings for clients, according to experts in mortgage finance industry.

While mortgage registration fees, which are charged on the mortgage value, have been cut from 1.75 per cent to 1.25 per cent, transfer fees, which are charged on the total value of the property, have been dropped from two per cent to one per cent.

According to leading mortgage consultants, the reduction on the transfer fee will have bigger impact as this is charged on the full property price.

Currently, these fees are 0.25 per cent and two per cent respectively in conventional home loan. The move becomes significant, especially in Dubai, because almost 60 per cent of the home finance is done through Shariah-compliant routes. While Tamweel and Amlak are the two major players controlling almost 60 per cent of the home finance market in the country, several conventional banks have Islamic offerings through their dedicated windows. Moreover, there are Islamic banks which are active in mortgage finance.

Explaining the impact of the reduction in Islamic mortgage charges, Jean-Luc Desbois, Managing Director, homematters, said in typical home finance with 75 per cent loan-to-value, the Land Department fee on conventional finance could work out as much as 10 per cent more than that of the corresponding Islamic mortgage fee.

"This difference will be more pronounced in the current scenario as the loan to value has been dropped by almost all home financiers. We need to understand that the higher charge, which is transfer fee – at two per cent, is imposed on the whole value of the property as against only 0.25 per cent on the mortgage value," said Desbois.

Most institutions have brought down their loan-to-value recently to cover themselves against the fall in property prices. Some have said to have gone to the extent of calling for additional collateral from the borrowers whose property value has fallen since the deal was signed.

There are different reports taking rounds all pointing to the fact that property value has fallen in the range of 20 to 40 per cent since August last year.

Though the banks argue there are clauses that support their act of calling additional collateral, experts are of the opinion this is not a good practice.

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