Hatim Najee is still delighted he managed to complete his first property purchase last December.
The 33-year-old bought his Dh3 million apartment in Executive Towers, Dubai, with a deposit of just 15 per cent.
“I couldn’t have afforded the property under the new rules,” says Mr Najee, “and I couldn’t have bought anything cheaper, because that wouldn’t have been big enough for my family and lifestyle. I would have been forced to continue renting until I scraped together a bigger deposit.”
While Mr Najee managed to secure approval for his 85 per cent mortgage just before the new rules came into effect, residents buying today are not so lucky.
Expatriates buying a property for under Dh5 million must now produce a minimum deposit of 25 per cent, rising to 35 per cent for properties above Dh5 million. For second properties, the minimum deposit is 40 per cent.
Emiratis have it slightly easier. But they still need a 20 per cent deposit for homes under Dh5 million, rising to 30 per cent for homes over Dh5 million, and 30 per cent for any subsequent properties. That is fine if you have a fat deposit or plenty of spare equity, but it is an extra hurdle if you have been scrambling to scrape together your deposit before prices spiral even further out of reach.
Even off-plan properties have become harder to acquire, requiring a 50 per cent deposit regardless of whether the buyer is an expat or a national.
After a 53 per cent rise in property transactions last year in Dubai to total Dh236 billion, according to Dubai Land Department figures, bringing with it an average growth in real estate prices of 22 per cent, according to Jones Lang LaSalle, few could argue against the need to calm the nation’s housing market.
However, some experts still question whether a cap on mortgages is the right way to contain price rises. Warren Philliskirk, associate director at Mortgage International Business Dubai, says most people who take out a mortgage in the UAE want to live in the property themselves. “The authorities are targeting the wrong people, most of the market speculation has been driven by cash buyers.”
But the cap is here to stay, so how can first-time buyers get a foot on the ladder?
“If you already have another property, either in the UAE or overseas, you could raise a deposit by releasing some of the spare equity from that, but first-time buyers won’t be in that position,” says Mr Philliskirk.
Alternatively, the mortgage expert says the lucky ones may be able to raise a deposit from their family, also known as “the Bank of Mum and Dad”, while others may have to lower their sights and buy a cheaper home. “My advice is: don’t just give up and do nothing,” adds Mr Philliskirk.
“Property prices should rise by at least another 15 or 20 per cent this year. You won’t be able to save a deposit fast enough, and will only fall even further behind. It may be better to buy a cheaper investment property today. You can get properties for Dh700,000. That will rise in value in line with the wider market and you could put the profit towards your deposit.”
Mr Najee, a Saudi citizen, doesn’t worry that putting down a small deposit leaves him vulnerable to a market correction. “My mortgage allows me to pay down up to 20 per cent of the outstanding debt every year, without penalty. Making overpayments should reduce my debt, and protect me in case prices fall in future.”
Right now, that seems unlikely. Mr Najee says prices for similar properties are rising steadily, and that’s another reason he is grateful to be on the property ladder.
If you are lucky enough to have an even bigger deposit than the new rules specify, you can turn that to your advantage, says Ambareen Musa at the price comparison site Souqalmal.com. “The larger your deposit, the less interest your mortgage lender is likely to charge, and the less mortgage debt you will be saddled with.”
She says that having a smaller debt is wise in case interest rates finally start rising – especially if you’re on a variable rate mortgage, as your monthly repayments would also rise.
Ms Musa says buyers can search for competitive rates online through comparison sites. “ADIB Home Finance for Expats, for example, offers variable rate loans up to Dh10 million from 4.49 per cent, provided you have a minimum salary of at least Dh15,000 a month,” she says. “ADIB charges locals 4.49 per cent but up to a higher maximum of Dh20 million and with a lower monthly salary requirement of Dh10,000.”
At HSBC, there is an interest rate of 3.99 per cent for those borrowing up to 60 per cent of the property’s value, rising to 4.49 per cent above 60 per cent loan-to-value (LTV), says Raman Muralidharan, the regional head of customer value management at HSBC Bank Middle East. “We also lend up to 75 per cent LTV on select developments, in line with the new mortgage caps.”
Mr Muralidharan says the cap should bring stability to the UAE property market. “Buyers need to work out how much deposit they can put up front, and how much they can afford to repay on your mortgage each month. These key factors will determine which property you can afford to buy.”
How much you pay for finance will also depend on what you plan to use the property for, says Sam Wani, a certified mortgage adviser and the general manager at Independent Finance in the UAE. “Some banks may demand a higher deposit if the property is meant for rental, rather than residential, use.”
Mr Wani also supports the new mortgage cap. “The danger of buying a property with a small deposit is that you could quickly plunge into negative equity if there is a sudden correction. That danger has now reduced, because the probability of prices falling more than 25 per cent is quite low.”
Instead of competing for borrowers with small deposits, Mr Wani says lenders have switched their focus to producing specialist mortgages for different types of borrowers, whether they are salaried, self-employed or earn commission only.
“There are now more than 30 lenders in the UAE and interest rates start from 2.99 per cent,” he adds. “You can choose from deals with interest rates linked to Eibor, [the interest rate charged by banks in the UAE for interbank transactions] little or no penalty if you settle early or remortgage, off-plan, non-resident and commercial mortgages. Choice is growing all the time.”
With more than 100 mortgages to choose from, it is worth taking independent advice to get it right, says Jean-Luc Desbois, the managing director at mortgage consultants Home Matters.
“Buyers have to decide whether they want Islamic or conventional finance, capital repayment or interest-only, fixed or variable rates,” Mr Desbois adds. “If you received bonuses, you might want a mortgage that gives you the flexibility to make overpayments.
“You also need to know how much interest you will pay after the introductory rate expires, how easy it is to move lender, and whether you will have to pay any charges.”
Look for an adviser who can give you advice across the whole market. “Finding the best mortgage can be very time consuming, and if you choose the wrong one, expensive. A good consultant may be able to secure better terms than if you went direct to your bank,” Mr Desbois advises.