DUBAI // Banks have been accused of charging mortgage interest above market rates for existing customers and imposing unfair penalties that deter borrowers from switching to competitors.
Most home owners opt for a variable-rate loan, so the rate should rise or fall with the Emirates Interbank Offer Rate (Eibor).
The six-month Eibor fell from 1.71125 per cent to 1.5375 per cent last month, but many banks say that is too low and have not cut their rates.
Yahya Ismail, 38, from Pakistan, took a Dh1.8 million loan in 2006 at 6.75 per cent, since reduced to 6.5 per cent. His bank in Dubai offers new applicants rates as low as 3.99 per cent.
But when Mr Ismail approached the bank to negotiate a lower rate, he was turned down.
Mr Ismail received a written reply in which the bank said "many factors" came into play.
"You will appreciate that the interest rate, as applicable to a customer, is dictated by several factors. It could vary by the particular product, its features and the point in time when the loan was availed," the letter said.
"The matter was discussed with the senior management and we regret to inform you that the bank is not in a position to grant you a further reduction."
When he approached the bank to make a switch to another lender, he expected to pay the Dh10,000 penalty specified in his contract. Instead, he was told to pay 3 per cent of the outstanding amount.
"That puts the client at a very great disadvantage because, one, you've increased his pricing and, second, you have removed his mobility to move to another bank, thereby killing the competition," Mr Ismail said.
Sam Wani, general manager of the mortgage brokerage Independent Finance, said Mr Ismail's was a common complaint.
"We see this here a lot. Now most banks are offering rates of 4.9 or 4.5 per cent with a fixed two-year deal. This may jump back to 6 per cent," Mr Wani said. "But the overall rates are low and have fallen substantially so his bank should have reduced the rates."
He said it was common for customers to find it difficult to change banks and suggested they should look for offers that come without the penalty clause.
"This penalty kicks in when you want to change the bank and that's when the client is at a disadvantage. A rate that was at 6 to 8 per cent two years ago, another bank may be offering a 4 per cent rate now, but the client can't move because he has to pay the penalty. Clients should be free to move around."
Even if the Central Bank were to introduce regulations allowing variable-rate mortgage owners to take their business elsewhere without penalty, the question of arbitrary rate fluctuations would remain.
Neither banks nor regulators are able to say who should be determining or monitoring the variable rate.
The fine print on loan contracts makes it possible for banks to change rates at will. In Mr Ismail's contract, for example, the bank listed several factors it could use to adjust rates, "provided we do not do so for any arbitrary or improper purpose". Acceptable factors included the rates charged by other banks and any new regulations or business restructuring.
The topic continues to be debated by Federal National Council members. Ali Al Nuaimi from Ajman, who heads the council's finance committee, said many borrowers were effectively trapped in their homes.
"Some banks are trapping [customers] financially … they can't move, and if they move they will be charged penalties," he said.
The committee has submitted a recommendation to the Central Bank urging banks to lower their interest and profit rates for all customers.
No one at the Central Bank was available for comment.
* With reporting by Ramola Talwar Badam