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Mortgage law shake-up on the way

By Muna Ahmed and V M Sathish




The rapidly developing mortgage sector in Dubai will be streamlined by a new law currently being drawn up. The legislation will take the place of a federal statute dating from 1985, which is regarded as outdated and unable to meet the demands of today’s market.


The move was welcomed by lawyer Sharatchandra Bose, an expert on mortgages, who said the introduction of effective rules would assist the future growth of the home loans market.


The new law will cover areas such as secondary mortgages – where a property and the loan on it are sold as a package – mortgage insurance and the registration of agreements.


Penalties for breaking the terms of a loan will be set out, as will arrangements for selling repossessed properties through an auction, a court order or Dubai’s Land Department.


The law should make it easier for expatriates to take mortgages. And it is intended to help UAE nationals, who at present have difficulty obtaining loans to build homes on land granted to them by the government.


A first draft is currently being prepared by a committee at the Land Department and will be ready in the first quarter of next year. At present mortgages are covered under the Amended Federal Law Number Five.


“There was an urgent need to come up with a new law to cope with developments in the real estate sector,” said Land Department Director-General Mohammed Sultan Thani. “The current law is more than 20 years old.


“Currently banks and finance companies face many problems in terms of recovery of mortgage debt. The procedures are too long and complicated. The new law will simplify these procedures and make it easier for both banks and finance houses and their customers.”


He said the legislation would allow lenders to be more flexible when giving mortgages to expatriates.


“Earlier, expatriates were not allowed to own properties in the emirate. However, recently they were given the right to purchase in some areas. Many buy with loans, but banks are hesitant to approve such applications as there are not enough safeguards for them. The committee drawing up the law is looking into this issue.


“Plus it is difficult for nationals to get a loan to build a house on land granted by the government. The new law will solve this problem.”


Bose, a contract and commercial specialist at Dar Al Adallah Lawyers and Legal Consultants, said: “Dubai’s mortgage sector has great potential for growth if an adequate and clear-cut mortgage law can protect the interests of lenders and borrowers in the freehold and leasehold markets.


“If banks and financial institutions are confident that such a law would guarantee the recovery of their money, they will sanction mortgages and strengthen the property sector. Some banks are reluctant to enter the market mainly due to the absence of a system governing ownership, specifically property repossession, enforced eviction and asset liquidation in the case of non-payment.”


Bose said the existing legislation was inadequate and did not address a number of important issues. “It is customary in Dubai that if a borrower has no place to live other than the mortgaged home and is unable to repay, he cannot be evicted since he has nowhere else to go. This is a protection given to the residents. In order to encourage lenders to enter the market their interests should also be considered.”


Bose made a presentation to Land Department officials in which he said there had been few mortgage defaults in the past three years. “The increase in prices enabled a borrower, who got into financial difficulty, to put their property on the market, make a healthy premium and repay the loan. But in bad times, when interest rates are high, some borrowers will not be able to pay back.”


He said some mortgage  advertisers made misleading claims about low rates and payments and withheld information about the true cost of loans.



Fact file


Current status of mortgages in the country:


Mortgages can be granted only on existing properties under current UAE law, which can create problems for those buying off-plan, said mortgage expert Sharatchandra Bose.


Developers have a right to sell properties that are yet to be built. But when a buyer applies for finance, the lender cannot enter into a mortgage agreement because the title deed has not at that stage been transferred into the name of the borrower.