x Abu Dhabi, UAESunday 23 July 2017

Relief for some over mortgage payment pain

Some property owners are crying foul, claiming that banks are increasing their mortgage rates in an unreasonable manner. But in Abu Dhabi at least, there is some relief.

A small rise in your mortgage's interest rate can have a huge effect on your monthly payment.
A small rise in your mortgage's interest rate can have a huge effect on your monthly payment.

Tempted by the UAE property market boom, speculators bought into the Arabian housing dream during the noughties, convinced they could make large returns overnight.  And so it proved, as people who bought early and sold quickly booked good profit. Latecomers, however, got more than they bargained for.  From the middle of 2008 until the end of that year, property investors watched helplessly as valuations plummeted during the worst economic downturn in 70 years. The dust from the biggest property crash in recent memory has since settled, with many experts and commentators insisting the market has bottomed out. But this relatively positive outlook aside, the misery continues for some unfortunate buyers. 

Seeing property valuations drop far below the prices at which they purchased is reason enough for some individuals to regret buying apartments and villas. So how must investors struggling to cope with substantial increases in their mortgage interest rates feel? Angry and confused, says John Williams, a South African expatriate living in Dubai.  In April 2008 Mr Williams, 38, bought a two-bedroom property for Dh2.5 million in Dubai's Jumeirah Lake Towers area after taking out a 20-year fixed-rate mortgage with Mashreq Bank. Mr Williams, who works as a financial director of a health-care company, says the mortgage application process itself proved troublesome. 

"It was appalling customer service, but I didn't really have much choice because they were the only ones providing the finance [for the property I was buying]." Using the Emirates interbank offered rate (Eibor) - the cost at which banks loan money to one another- to calculate his interest, Mr Williams says he should have been paying around 6.85 per cent between October 2009 and January this year, when Eibor was set at 1.9 per cent (the rate has since changed to 2.2 per cent).

But he says Mashreq sent him a letter late last year stating that Eibor would be dropped and replaced with the bank's own interest rate, which it calls Mashreq Prime. The result is that Mr Williams is paying two percentage points more than he thought he would be, resulting in monthly repayments of around Dh18,000 instead of Dh15,000.  "In other countries you have the opportunity to give back the keys and say 'here is the apartment, you have breached the contract and I am walking away ... " Mr Williams says. "Here you don't have the option because they have your postdated cheques, and if you do not pay they will present them to the police and you will go to jail. There will be people who go to jail because they can't afford to pay."

Feeling aggrieved with how he was treated, Mr Williams recently joined an action group that is threatening to take Mashreq to court. About 40 people who received similar letters from the bank alerting them to rising interest rates have joined Mr Williams; they allege that the bank has broken contracts by introducing its own system to calculate mortgage repayments.  In response, Mashreq says falling property values and a change in funding costs following recent interest adjustments at other banks, which are not reflected by Eibor, have forced it to make changes. "Most retail banks in the UAE have already moved off Eibor as a reference rate for mortgages," the bank said in a statement. "Mashreq is responding to extraordinary financial conditions beyond its control and is not in any way seeking to take advantage of its customers."

Recent reports suggest that Mashreq mortgage holders are not alone in paying over the odds. Independent Finance, a mortgage advisory firm, revealed in late January that some homeowners could eventually pay much more than the value of their stated mortgage once all is said and done. The calculation was based on interest rates ranging from 6.5 per cent to 8.5 per cent in Dubai.  Buyers with a Dh2 million, 25-year mortgage will have shelled out between Dh4.07 million and Dh4.86 million once interest payments and other costs are factored in, according to Independent Finance calculations. Those costs include bank process fees of as much as 1.25 per cent, mortgage registrations amounting to 0.25 per cent of the loan value, and valuation fees rising to Dh3,000. 

Soaring interest rates partly explain why demand for mortgages dropped during the first half of 2009. Central Bank figures revealed that mortgages provided by the UAE's 52 banks totalled Dh12bn from January to June, down from Dh44bn in the same period in 2008. The global crisis also contributed, of course, as fewer people were willing or able to take on home loans during a recession. For those already locked into mortgages with high interest rates, there is little escape from the soaring monthly fees. But prospective property buyers could secure far more attractive terms from lenders keen to lure investors back to market. Earlier this month Abu Dhabi Government's department of finance provided an undisclosed sum to Abu Dhabi Finance (ADF), enabling the mortgage provider to reduce the cost of home loans in the capital.

Buyers can now get mortgages at 5.75 per cent annual interest, against the 8 per cent on offer before the Abu Dhabi Government stepped in. The cut represents a monthly savings of Dh2,450 on a Dh2 million loan.  Mortgage provider Abu Dhabi Finance (ADF) cut its interest rate after receiving an undisclosed amount of funding from the Government. "With lower rates available and the initial completion of freehold supply, more buyers will be encouraged to purchase rather than lease," said Landmark Advisory's Jesse Downs in response to ADF's mortgage rate cut.

Ms Downs, the director of research and advisory services for the real estate consulting company, added that lower interest rates would not spark a surge in UAE property sales. "The market is currently at a standstill," she said. "While these changes are expected to stimulate demand, the improvement will be moderate in absolute terms. We do not expect the volume of transactions to increase significantly in the near future, even for close-to-completion developments."

Earlier this month, Sourouh Real Estate, the second-largest property developer in Abu Dhabi, began offering mortgages at 4.99 per cent through ADF. The shift that some financial institutes have made to lower interest rates is a welcome development, according to JP Grobbelaar, director for research and advisory at Colliers International. He feels that now is as good a time as any to consider buying a villa or apartment, especially in Abu Dhabi, where interest from prospective buyers remains high.

"I am not making recommendations, but certainly the demand for property in Abu Dhabi and Dubai is greater [than other emirates], so you would be able to realise your investment in those areas depending on what price you were looking for," he says, "There are good investment opportunities for both end-users and investors." "Prices appear to be bottoming out; we can't say for sure at this point in time but there are indications. They have dropped by almost 50 per cent since the third quarter of last year, and the question at this point is whether the prices we see now are in fact the true value of residential property on the market."