Last year, when times were better and property values seemed to be appreciating by the week, mortgage rates didn't garner much attention. For the thousands of investors who participated in the great UAE property frenzy of the last few years, the main challenge was simply buying a place. Property and rental values were rising so fast that they easily offset any costs associated with home ownership, such as mortgage payments and fees.
"With increasing values on property, the market thought it was a reasonable price to pay for mortgages," said Chris Dommett, the chief executive of John Charcol Dubai, a mortgage specialist. The situation has vastly changed. UAE expatriates living and working here are dealing with declining job security, redundancies and frozen bonuses and pay rises. Among those who purchased real estate during better times, there is also the heart-wrenching realisation that their properties are worth less now than they were when originally purchased, something that no one likes to hear.
For these investors, the arduous task of repaying the mortgages looms, and at rates considerably higher than in the US and UK, to name but two countries. Anyone who took out a home loan to purchase a villa or flat in the Emirates, or is still hoping to do so, is looking at paying between 8 to 9 per cent in interest, or "profit rate" in Islamic mortgage terminology. Ryan Mahoney, the managing director at Better Homes, a property broker in Dubai, said buyers often benchmark against prevailing rates in their home country. Expats from the US, where 30-year fixed-rate mortgages are currently hovering around 5 per cent, would have a hard time swallowing the local rates. Investors from India or South Africa, on the other hand, where rates are similar or higher to those in the UAE, may take a more forgiving view.
Over the long term, the bottom-line costs of paying off one mortgage at 5 per cent and another at 8 per cent are huge. Consider two homeowners paying off mortgages worth US$200,000 (Dh1.2 million) over 30 years. Assuming they made only the minimum payment monthly - which many financial advisers stress is a bad idea, urging homeowners to make extra payments if possible - the first homeowner, with the 5 per cent interest rate, would pay the $200,000 in principal, plus $186,640 in interest, over the three decades. The second homeowner, however, at 8 per cent, would pay the $200,000, plus a whopping $328,480 in interest.
The latter scenario is a common one for homeowners in the UAE. Last year, at the height of the property boom, UAE mortgage lenders - including Tamweel, Amlak, HSBC, Standard Chartered and First Gulf Bank - were offering loans for roughly 7.5 to 8 per cent annual interest. In addition, and this is an important point to remember, many mortgages here are written at floating, as opposed to fixed, rates, meaning they will almost assuredly rise. Indeed, the interest or profit rate has grown to roughly 9 per cent this year, ostensibly due to the effects of the global economic crisis.
And speaking of personal finance, here is where it gets personal to me. Last year, I purchased a flat at Al Reef Downtown, a project by Manazel Real Estate. I obtained a mortgage from Tamweel with a rate of 7.9 per cent. Even though I purchased the flat as a long term investment, the volatile property values this year has made me re-examine the terms of my mortgage. My experience has taught me to be extremely cautious about the terms of any loan and to make sure that I understand every detail before signing on the dotted line. For example, the rate on my mortgage could rise in a few years, and if I want to pay off a portion of my balance early I will likely incur significant penalties. Several months of speaking with Tamweel representatives on the phone and at their offices led me to the frustrating conclusion that their policies were constantly changing. At the moment, with a merger with mortgage lender Amlak apparently imminent, Tamweel has said it won't accept any prepayments at all.
With penalties and inconsistent policies like these, the entry of a new provider late last year raised my hopes that a new era in the UAE mortgage market was upon us. Abu Dhabi Finance was created by the Government in response to the liquidity crisis, but so far it has done nothing to offer mortgages at lower rates. Like the other regional home-loan providers, its rates are between 8.5 and 9 per cent on most property developments.
Answering critics, the company said it brought liquidity into the market when other lending sources had been frozen and that it was putting emphasis on evaluating mortgage terms - such as loan-to-value ratios, mortgage tenure and repayment viability - in its overall loan programme, as opposed to focusing solely on interest rates. With off-plan purchases of flats and villas down sharply this year, the high mortgage rates are likely, in part, holding back the market's recovery, Mr Mahoney, of Better Homes, tells me. "I wish they would reduce the rates," he said. "Without question, a lot more people would buy property."
After factoring in mortgage repayment fees and maintenance costs, he says, property buyers looking to purchase flats to rent out may decide the costs aren't worth it. "Some investments do make a good return in spite of it, but there are others that are basically nullified by the cost of interest," he says. "If people have a target of earning 8 to 10 per cent return annually, it's difficult to achieve that when you are paying 9 per cent on your mortgage."
Regional banks defend their rates with several arguments. They say the global economy is in the midst of a liquidity crisis, and also bring up their increased costs of borrowing money. Another factor banks face is the risk of expats fleeing the country after losing their jobs, leaving behind debts and unpaid loans. Finally, the lack of a countrywide credit union prevents banks from fully assessing the creditworthiness of individuals. To compensate for these issues, banks say they must keep their rates high to help recoup their associated costs.
While the high rates may sound like a serious challenge to the recovery of the UAE's property market, there are other more pressing matters the Government faces, experts say. In the West, mortgages constitute a giant slice of countries' economies - 83 per cent of GDP in the UK and 76 per cent in the US, for example. But here that figure is a minuscule 3.3 per cent, according to Abu Dhabi Finance. This means that mortgage reform is overlooked in favour of other, more critical economical concerns. And this is bad for the market.
"The biggest problem is liquidity," Mr Mahony said. "So as far as the Government and Central Bank is concerned, it is not a big deal. They wouldn't see [the mortgage market] as absolutely essential in fighting the crisis." Pointing out the anaemic condition of the today's property market here, he says opportunistic individuals looking for bargains are mainly using cash for their purchases. What is the lesson here? First, as I mentioned above, be sure to read carefully any contract before you sign it. And second, hope that the Government takes steps to help banks to make it easier to provide mortgages to long-term investors at more palatable rates. email@example.com
Speak to your bank, or preferably an independent-mortgage broker, before beginning your property search. The right adviser can make all the difference in the world Establish what you can afford as a down payment, and also how much you can comfortably afford to repay each month, taking into account all your other commitments, such as car loans, education fees and credit card bills Ensure that you have all documentation ready in advance, such as your salary statements Ensure that the mortgage you choose fully meets your requirements and that you understand all lender's charges both now and for the future (for example, prepayment penalties) Obtain a pre-approval before committing to a purchase and putting down a deposit Ensure that the property you choose meets the terms of your pre-approval exactly, and is on the lender's approved list of developers Allow plenty of time (at least three weeks) to complete the mortgage process when agreeing to a transfer date for the property Budget for the fees involved, including the lender's processing fee, and the property agent's fee
Do not sign an agreement to purchase (either an MoU or S&P agreement) or put down any deposit until you have written confirmation that your mortgage is approved Assume that your mortgage will be approved quickly. As with most complex processes, this one can take longer, especially in today's economic climate. Keep this in mind and do not lose patience Forget to get your personal finances in order before you fill out a mortgage application; bounced cheques or missed loan payments can have a detrimental effect on your chances of owning the home of your dreams Assume that interest rates will always remain at the same level; if you are lucky enough to receive a discounted initial rate, make sure you can afford the mortgage when the rate reverts to the standard level.Many people have failed to read the fine print on their contract or ask the pertinent questions about their mortgages, and when the first "amended" statement arrived found themselves unable to paythe bill. Don't let this situation happen to you. Tips supplied by Chris Dommett, the chief executive of John Charcol, a mortgage consultancy based in Dubai