How to unlock the cash in your UAE home

Equity release mortgages are becoming increasingly popular in the UAE as residents with low outstanding debts on their properties cash in.

Equity release mortgages are increasingly popular in the UAE, as they give residents with low debts on their properties access to collateral. Christopher Pike / The National
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If you are a UAE homeowner looking for some extra money, the solution could be right underneath your feet.

Home equity mortgages provide customers with large equity or little debt against their property the opportunity to release some of the collateral in return for a monthly repayment.

And with the majority of buyers paying for their properties with cash in the UAE, many could potentially benefit.

However, while these products are not a new development in the personal finance market, their growth in popularity is.

“They have always been there in the region,” says Warren Philliskirk, director of Mortgage International in Dubai. “But they have become more popular in the past year.”

Mortgage International has noted a 50 per cent rise in the last 12 months of the number of people taking out home equity release mortgages – not to be confused with lifetime equity release mortgages available in other countries in which the borrower settles the debt at the time of their death or the sale of the property.

And searches for home finance at Souqalmal.com, a website which allows people to compare loans, credit cards and insurance, have risen by 35 per cent in the same period.

"With increasing house prices in the UAE and 80 per cent of transactions in cash, it is not surprising that consumers would be asking the question of how to unlock cash from their homes without having to downsize," says Ambareen Musa, the founder and chief executive of Souqalmal.com.

“Generally, the wealth-rich and cash-poor property owners find equity release very attractive, as it allows them to keep the asset but at the same time increase the level of cash they can access.”

With so many potential borrowers, most banks in the UAE now offer the facility in the UAE with Mashreq the latest institution to release a home equity release product last month.

There were numerous reasons the bank introduced the product, according to Caetano Fernandes, the head of Mashreq Gold.

“Most importantly the government introduced some really positive measures in controlling the overheating property market. That gave us a lot of comfort because the last thing you want is to get into a market that is a bubble,” says Mr Fernandes.

The bank also spotted an opportunity to position mortgages as part of the wealth strategy of an individual, he adds.

“Let me tell you why. You go to any party or you go to any event, what are people talking about at all times? Property. How much is your apartment worth in Dubai Marina? How much is your apartment worth in Downtown Dubai in the Burj?” says Mr Fernandes.

But what are the benefits for borrowers?

There are four main reasons to release the equity in a property, according to Mr Philliskirk.

The first – self-employed residents considering a cheaper method of funding their business expansion or increasing their cash flow – is currently the most popular, he says.

“As their requirements have increased and their businesses have grown, as they have come out of the recessionary period, entrepreneurs have looked more at their properties as a way of funding those things,” says Mr Philliskirk.

“You are looking at 15 per cent or 20 per cent [in interest for small business loans], so if they have equity in their property it makes sense for them to utilise that as collateral.”

And Mashreq is hoping the self-employed homeowners’ slice of the equity release mortgage market grows still further.

“A lot of the small business owners and partners are looking at this. It is a fixed asset that is secure which you still own. The tenures are longer, 25 years and so on,” says Mr Fernandes.

“So I don’t see why this couldn’t become a bigger trend. We are hoping that word will rapidly spread and home equity will become a greater share among the business community’s borrowing to really enhance their cash flows.”

Equity release may also make sense for borrowers consolidating more expensive loans or those over shorter terms, while customers moving to another bank to get a better rate may also be interested in the prospect of freeing up cash at the same time.

And then there are those customers who would like to reinvest the capital to buy more property.

This may seem like a good investment at first glance, particularly in light of recent eye-watering property price increases.

Economists estimate that residential property prices rose by almost a quarter, at 24 per cent, in Dubai and 21 per cent in Abu Dhabi last year.

“Right now it’s most definitely slowed down,” says Michael Lodge, sales director for propertyfinder.ae.

“My suggestion is that if people are looking to remortgage … or if you are looking at equity release to buy a second property, be wary that the market is not what it was this year. It’s stabilising, which is a good thing.”

And while equity release may seem like a more attractive option for other uses, like the self-employed wishing to use the cash to expand their business, there are also hidden dangers involved for them, cautions Ms Musa. They include costs, such as arrangement fees, lawyer fees and the profit charged by the bank.

And of course, the equity release mortgage is dependent on property prices climbing, keeping borrowers in positive equity.

“In the case of another property crash, depending on the drop in prices, you may find yourself having more debt than what your property is worth and defaulting would result in losing your home and potentially having no more retirement plans,” adds Ms Musa.

But how likely is another property crash?

The Central Bank recently warned that the property market may be overheating on the basis of the rise in prices last year compared to a drop in rental yields from 7 to 8 per cent to between 5 and 6 per cent, indicating an imbalance.

“A major market correction … could harm lenders to the real estate sector, as falling prices would reduce the repayment capacity of developers,” warned the regulator this month, proving that even a seemingly sound investment may have shaky foundations – for both borrowers and banks.

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