x Abu Dhabi, UAEFriday 21 July 2017

Learn the lingo before you sign on the dotted line

Bradley Hope: A central tenet in modern economy should be: "Take nothing at face value."

A central tenet in modern economy should be: "Take nothing at face value." In a world that inundates its citizens with advertisements hand crafted by neuroscientists and deeply complex documents that would take a team of lawyers and accountants to decipher, the simple consumer can easily fall into the clutches of those not necessarily looking out for their best interests. Take the offer of a new mortgage rate from a bank, which we have been seeing with increasing frequency of late. These typically come with what is known as a "teaser rate". A teaser rate is usually several points below the prevailing interest rate, so on the surface it seems like a good deal.

In some cases, a closer look may reveal that the teaser rate is not what it seems, however. In Abu Dhabi, for instance, it is often more difficult to get a mortgage when you are buying a home from the second-hand market than if you are buying from a developer directly. Developers are also more likely to offer mortgages with teaser rates or much lower rates than the market norm. But, those same developers often ask significantly higher prices for their properties than sellers on the second-hand market. So the developer's mortgage may seem cheaper but it is only accessible if you pay more money for the property.

What is more, after a year or two, the teaser rate might disappear, switching from a fixed, low-cost rate to a variable rate that changes according to the London interbank offered rate (Libor). A buyer can almost always be sure that such contracts are written in the best interests of the bank and its shareholders. Now, this does not have to be the case. A well-educated consumer is a powerful thing. Because the economies of the world are so vast and complicated, the average person needs to become more of an investigator than he or she was in previous decades.

This means to succeed in the financial world, or at least make it through unscathed, you have to learn the meaning of the terms in contracts and financial statements. What is a "variable Libor rate"? How do banks calculate credit-card interest? What is a "related-party transaction"? Even accountants have trouble understanding the true financial position of a company. They need constant training to be able to keep up with those who devise increasingly tricky ways to express information on financial statements. So much so, one would be forgiven for thinking they were trying to conceal it.

A well-known businessman in Dubai recently told me that when someone offers him a deal that has a "guaranteed return of 20 per cent", his first instinct is to bolt out of the room. "Nothing is guaranteed," he says. "And even more importantly, they are offering me something with a return higher than I can get elsewhere. There must be some risk to the investment that I do not fully understand." These offers seem to swirl around booming economies, such as the UAE's, in ever greater numbers.

There has been no bigger benefit for consumers and investors than the arrival of the internet, which allows people to connect to each other and share their discoveries. There are large consumer advocacy websites that expose pyramid schemes and scams. One person's mistake told on such a site can prevent dozens more from falling victim. What is clear is that a big, evolving capitalist economy is full of perils. A badly worded contract could leave home buyers waiting an extra two years for their apartments. A quick acceptance of a deal could mean a greater cost down the road. An investment made on purposely muddled financial statements could turn into a deep loss.

The only way to survive is to get good information before making decisions and this can only be done if consumers and investors also consider themselves investigators. So, the next time someone offers you the deal of a lifetime, be polite but explain that you have a "few more questions to ask". bhope@thenational.ae