x Abu Dhabi, UAEFriday 28 July 2017

New mortgage cap rules are welcome

The cap on mortgages will ensure stability and steady development of the property market.

The UAE has learnt the lessons of the global economic crisis by introducing measures to protect its property market and prevent reckless borrowing. As The National reports today, after almost 12 months of negotiations with local lenders, the UAE Central Bank has issued its rules for mortgage caps, which will effectively restrict how much a homebuyer can borrow against the purchase price of a property.

The new rules will restrict loans to 80 per cent of the property’s value for UAE nationals and to 75 per cent for expatriates. In addition, loan repayments should not exceed 50 per cent of the borrower’s monthly income. The maximum loan that can be provided to those buying property off-plan is 50 per cent of the purchase price.

The new rules are welcome. A boom in lending, unsustainable rates of loan-to-value ratios and a seeming lack of due diligence by banks and institutions, are the reasons large parts of the world suffered economic failure five years ago, as subprime mortgages and toxic loans spooked the markets and plunged many economies into a deep and long-lasting recession.

The recovery in property prices in 2013 and the improving economic outlook could easily have encouraged borrowers to reach beyond their means once more, as the International Monetary Fund (IMF) warned in a report published earlier this year.

Despite concerns from commercial banks that the new regulations could stifle the recent recovery and stall property prices, they are unlikely to do so, as 70 per cent of home buying in the UAE was completed with cash last year, according to another IMF finding.

The cap is therefore targeted as much at the psychology of the property market as it is at the mechanics of its operation: it is an indication that the Central Bank is prepared to act to restrain inflationary tendencies. It will also combine with the proposed national credit bureau, which is expected to be fully operational in 2015. The bureau will allow the 23 national banks and 28 foreign units operating in the UAE to share information and assess the suitability and risks of a borrower. All of which should ensure that the crash of 2008 will not be repeated.