Against their better judgement? UAE banks finding more and more ways to lure customers into more property loans
Property owners in Dubai who are keen to acquire another in the city needn’t be too concerned about how to go about funding the purchase. These days, more banks are willing to go more than halfway in meeting investor requirements where they use their existing properties as collateral. In other words, unlock the “current” value of their existing asset to finance their next one.
Investors would be better placed if they do not have any existing obligations on their existing properties. The generosity on the banks’ part has got to do with the way property values have been going up in Dubai. “When you have this kind of value gains on property, banks can lend on the existing asset through a top-up loan, which could then be used by the borrower as down-payment on a second property purchase,” said Niraj Masand, director at Banke M.E., the property services firm. “Under the current rules on mortgage lending caps, banks can offer up to 60 per cent for a second mortgage — this effectively limits such transactions to cash-rich buyers or investors.”
It is easy to see why this interests banks. They have collateral by way of the first property, while any new arrangement helps deepen their relationship with the property owner over a longer term. In Dubai, average property values were up 51 per cent last year, though the pace of growth has slackened since the start of this year, according to Cluttons data. Residential values expanded by 3 per cent in the first quarter after rising by nearly 6 per cent in Q4-2013, the Cluttons data finds.
If it is not a new property that the investor wants, banks are just as willing to extend financing — based on the existing property — for possible investments in the stock market (performance of the UAE bourses have been robust and the upgrade to full “emerging market” status will be another boost) or for using it for their business needs. Some of the offers talk about extending funds of up to Dh15 million.
“Recent moves to allow dual mortgages will be a magnet towards unlocking liquidity that is latent in the banking system and allow for a broader spectrum of the population to participate in the wealth effect of rising real estate prices,” said Abdul Hakeem Kamkar, director at Global Capital Partners. “By itself, this creates a virtuous cycle for the sustainability of the real estate sector.
“But prudent lending measures must be adhered to. Towards this end, the UAE Central Bank’s mechanism of weeding out speculation and creating sophisticated standards of prudential lending offer the greatest hope that lending practices will not contribute to a speculative bubble this time around.”
Tighter caps on mortgage lending may be in place, but that is not stopping prospective home owners to look around for options.
“We have seen an increase of 100 per cent in searches for home loans on Souqalmal.com from February to March — as the economy is booming and confidence in the property market is on the increase, many buyers are looking at either buying their homes or setting up their investments in Dubai,” said Ambareen Musa, founder and CEO of Souqalmal.com.
“This explains the increase in searches for the best deal on home loans in the market, but there is no evidence that there has been an increase in second home buying in Dubai.
“For second home loans, it is more difficult for banks to provide funding, the main reasons being customers require a much bigger deposit of 40 per cent to obtain finance. This would limit the second home buying to cash-rich customers.
“Moreover, you have to consider the debt burden ratio where a customer cannot have more than 50 per cent of his income being spent into paying back any debts that he has. So if someone already has financed their first home and has a personal loan as well, it will be harder to have another layer of financing.”
The new tighter mortgage caps came into effect in December last. Part of the sharp increase in buying activity during October and November is explained by the fact that buyers wanted to sign up for mortgages without the stricter limits.
The cap has since put curbs on transaction activity. “The increased size of deposits means that property options available to mortgaged buyers is likely to be restricted to the lower end of the property spectrum and has already had an impact on transaction volumes,” said Steve Morgan, Middle East head of Cluttons.
“We expect the transition from rented property to owner occupation to take longer as deposits are amassed, which is translating into a slowdown in the number of deals being recorded.”
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