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Abu Dhabi, UAEMonday 17 December 2018

Homefront: 'Is it legal to ignore the 25% mortgage cap?'

Some agents and sellers are setting up transactions to allow buyers to purchase a home with a smaller deposit

Some UAE buyers are struggling to raise the 25 per cent deposit required by law. Pawan Singh / The National
Some UAE buyers are struggling to raise the 25 per cent deposit required by law. Pawan Singh / The National

Many potential first-time home buyers, like myself, are struggling with the requirement to put together a 25 per cent cash deposit. Recently, I'd heard whispers that some agents/sellers may be setting up transactions in a way to help buyers avoid this issue. Specifically, it would work like this:

* Let's assume the home costs Dh3 million, and the normal deposit required by the buyer is Dh750,000.

* The buyer and seller agree to two Memorandum of Understandings. There is one MOU indicating a sales price of Dh3, which is used for a bank valuation (and mortgage) purposes.

* There's a second MOU that reflects the actual price paid by the buyer to the seller, which, for example, is Dh2.55m (85 per cent of the valuation price).

* The buyer has 10 per cent of the deposit in hand, and the seller willingly takes a 15 per cent loss (remainder of the deposit normally due) to sell the property. The seller then provides a letter to the Dubai Land Department attesting that the seller has received 25 per cent of the Dh3m purchase price, and the bank goes on to provide a loan of 75 per cent for the remainder of the home value.

This set-up seems questionable in terms of whether it is legally acceptable by the authorities. On the one hand, the bank is only providing a mortgage for up to 75 per cent of the home value (as per regulations), and the seller is willingly losing 15 per cent of the cost to move the property. In this regard, I don't know if (or why) the bank would have a problem so long as the seller and buyer are in agreement, as the bank is not being tricked into providing any type of excess mortgage. On the other hand, what makes me really question this is that the seller would attest to the DLD that he's "received" the full 25 per cent from the buyer, even though the buyer has only paid 10 per cent and the seller is willingly taking a loss on the other 15 per cent. So, is this type of arrangement legal considering the strict mortgage deposit requirements in place in the UAE? RA, Dubai

Is it legal to do this? In a word: no. I would never encourage this type of sale because in effect the buyer is defrauding the bank in getting it to lend a higher percentage of loan to value than is actually allowed. I know in the past some banks did somehow allow this, but I believe this behaviour was from a minority of individuals working within financial institutions rather than the banks themselves. Sellers just want to sell their property at a fair price, so if a buyer was to come along and request this type of purchase, on the face of it a seller may be tempted but again I stress this is not legal.

There are other creative ways of getting extra finance from banks in addition to the 75 per cent loan to value. Many offer extra loans to help reduce the amount a buyer has to put down as a deposit, this of course would be subject to each individual case. Others also offer loans that would help to contribute to the additional purchase costs, such as the fees for the DLD and broker fees. So, despite the existence of the type of deal you mentioned, there are many legal ways of facilitating a buyer in his/her quest to purchase a home. I realise it is tough to raise the 25 per cent required to get mortgage finance but I know banks are lobbying the Central Bank of the UAE to enable these credit terms to be relaxed a bit.

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Mario Volpi is the sales and leasing manager at Engel & Volkers. He has worked in the property sector for 34 years in London and Dubai

The opinions expressed do not constitute legal advice and are provided for information only. Please send any questions to mario.volpi@engelvoelkers.com