The days of 95 per cent finance are long gone with mortgage lending down to as low as 50 per cent Loan-to-Value (LTV) with off-plan property financing becoming an additional challenge. We might be witnessing a slow price correction at present, but how fast and sustained it will be has yet to be seen.
However, buying a home of your own continues to be a life goal for many and for those looking to fund such purchases with a loan, it is vital to be well-prepared for each step.
Prepare a personal financial statement to see where you stand financially before plunging into additional debt.
Banks across the UAE have recently hiked the minimum monthly salary threshold to qualify for a personal loan or mortgage. HSBC and National Bank of Dubai now require a salary of Dh25,000, while Abu Dhabi Finance, ADCB, RAK Bank, Standard Chartered, Lloyds TSB, Dubai Islamic Bank, Mashreq and Barclays now average between Dh8,000 and Dh15,000.
"It is imperative the customer is clear on the objective of the purchase – investment or end-use – because financial providers are willing to offer better terms for end-users if this is clear," says Suvo Sarkar, Executive VP & General Manager, Retail Banking, Emirates NBD, adding that customers should also make sure their mortgage plans fit into their cash flow projections.
Contact a competent lender or broker to see how much mortgage you can afford and qualify for. Make sure you know your income, assets and credit and what best fits your particular family need. Leverage professionals' advice on what is the best lending programme for you, taking into consideration factors such as how long you are planning to hold on to a property for.
Faced with an ocean of information, potential investors tend to go with their gut when choosing a property and financier. Too often, investors solely rely on word of mouth or a friend's recommendation to seal the deal.
"As a home buyer you must shop around for the best deal," says Adrian Quince, Regional Manager – Home Finance, HSBC Bank Middle East. "Take your time to know the terminology, types of mortgage on offer and how these options fit with your financial plans. It is imperative home buyers are aware how practices between developers, financial institutions and realtors differ and take these into account."
Strict checks on pricing parameters and list of properties financed continue unchanged. In addition to mortgage protection, banks such as HSBC and Emirates NBD are offering the Emirates Interbank Offered Rate (EIBOR), which is re-priced every three to six months based on the prevailing EIBOR rates, passing the benefit of any reductions to the customer.
"Although the down payment required to secure mortgage is now higher, it still remains a sound investment for a person wanting to purchase a home," says Emirates NBD'S Sarkar. "This holds especially true when a property price has reduced, such as now, to an affordable level and where the current price is a truer reflection of its value."
Developers are also chipping in. For instance, when Schön Properties realised customers were looking for an integrated solution to their property woes, it decided to set up an in-house mortgage advisory service for customers.
"Our approach differs from other developers' plans, we now offer beneficial payment plans to investors and additionally offer support for off-plan mortgages by selecting banking partners based on customer eligibility," says Executive Director Sonia H Schön.
With more diversified financial solutions now available, we're seeing how limited loan options were five years ago. Mortgage-backed securities such as the erstwhile Tamweel and Amlak finance were unable to leverage the same flexibility as banks with their own depositor base. As a result, customers were charged a higher cost of mortgage payments.
"Greater collaborations between banks and real estate firms will certainly benefit the customer by providing access to more innovative financial solutions and more attractive properties and lifestyle concepts to invest in," says Sarkar.
Abu Dhabi Finance (ADF) is a result of such a collaboration; formed to stave off economic damage from the credit crisis, ADF extends its reach across the UAE offering tailored mortgage solutions that are designed based on each individual's payment profile.
Its Essence mortgage, for example, offers LTV ratios of up to 85 per cent with spreads from three – 30 years with various repayment options, which includes one-month payment holidays, and overpay option by up to 10 per cent without any charges, which also means that the customer only pays an early repayment fee on 90 per cent of the outstanding amount.
Interestingly, Abu Dhabi has stood resilient against this current downward shift. "It would be an exaggeration to describe current conditions as a slump in Abu Dhabi," says Philip Ward, CEO of the recently formed ADF.
"All developments under construction by the main developers are going ahead according to plan and, tellingly, we have received a lot of interest from consumers looking for mortgages since our launch last year," he added.
Once you've researched and compared the rates available, eliminate those that don't work well for you. Plan your budget and make sure you don't take a mortgage you can't afford. One person's pricing solution may not well work for another; therefore choosing a pricing structure to suit your needs is extremely important in order to avoid any future surprises.
You can ask a real estate authority or independent consultant on what aspects of the home are looked at when assessing its property value. Remember, this can be highly dependant on location, kind of neighbourhood, the time the house was built among other categories. If you have more than one credit card, carefully inspect your billing statements and ensure you are in good standing with your card companies. A good, reliable credit history is a vital aspect banks and lenders often look into. This helps them determine your ability to pay off whatever they will be loaning you.
"Current market conditions have forced all mortgage providers to re-evaluate their lending criteria," says ADF's Ward. "While we aim to provide mortgages to a wide range of applicants, we only grant those appropriate to the individual's circumstances and repayment ability."
The country's credit growth is predicted to slow to 10 per cent in 2009 and the Central Bank is encouraging banks to leverage the institution's extension of liquidity services being offered to them (dollar/dirham swap and discount facility). Since the introduction of the swap, there has been a marked reduction in the EIBOR rate, which is more pronounced at the short term (one month) with the longer term rates (two to 12 months) also seeing decreases.
"In the UAE, it is key for prospective buyers to check if the estate broker transacting the deal is registered with the Dubai Government and confirm the development has been approved," says HSBC's Quince.
Dubai's recent enforcement of the new Law 13 now requires all developers to have an individual pre-title registration document for all units.
It is also important that the Real Estate Regulatory Agencty (Rera) recognises these in order to transfer the property to the buyer's name and have the mortgage interest registered against the property. If you have a good mortgage in place; ensure you're completely aware of the penalty clauses in the case of early or missed payments.
Remember the cheapest home loans can come with strings attached, particularly those with fixed, discounted or capped rates. "Most lenders are only financing those customers who fit their retail lending policies; exceptions to the rule are no longer possible," says Schön.
Have a Mortgage? Consider Refinancing
Over the course of a typical mortgage, a home owner will have an opportunity for refinancing. The reasons to do so include saving money by lowering the interest rate, stabilising the monthly repayment by switching to a fixed-rate mortgage or even making monthly payments more manageable by stretching out the remaining loan term.
"Refinancing is a valuable option, but it need not make good financial sense for everyone," says Quince. "Remember that if you extend the term of your loan, you will reduce your monthly repayment but you will end up paying more total interest over the years. It has been shown that it takes at least three years to realise the savings fully from a lower interest rate, given the cost of refinancing."
With that said, ensure you know the refinancing options available to you and negotiate the best possible rate if the numbers work out in your favour.