UAE mortgage caps - friend or foe?
PROPOSED mortgage caps rocked the headlines towards the last quarter of 2012, with media coverage reaching a confusing frenzy as banks struggled against the implementation of the new changes, and residents struggled with the exact details of the proposal itself! Ludmila Yamalova, founder and managing partner of HPL Yamalova & Plewka JLT Legal Consultancy who specializes in real estate and property law and is a regular presenter on The Property Show on Dubai Eye 103.8, was kind enough to sit down with us and clarify what the proposed changes will mean for future property buyers.
What is a ‘mortgage cap’? A mortgage cap is the maximum percentage of financing in relation to the value of the property that the bank will lend to the borrower. It is commonly referred to as the loan-to-value ratio or LTV. For example, if the mortgage cap is 50% on a property that is valued at AED 1 million, the maximum amount that the bank will finance toward that property will be AED 500,000, or 50% of AED 1 million.
What is the current situation with Central Bank’s plan to implement a ‘mortgage cap’ in the UAE? On December 30, 2012, the U.A.E. Central Bank issued a directive setting a mortgage cap. The issuance of the directive has caused a major outcry by the banking and finance industry, as well as by real estate investors and end-users. To that end, a number of banks have come together to petition the UAE Central Bank to raise the mortgage limit. The UAE Central Bank has stated that it is reviewing the proposal and will advise the public accordingly. However, no official amendment to the original December 2012 directive has been issued. Therefore, from the legal standpoint, the directive is still in effect. The enforcement of the directive, however, seems to be put on hold, pending the UAE Central Bank’s review of the issue. In the meantime, some banks have begun to enforce the new mortgage cap, while other banks continue to loan as per their previous practices.
What is the mortgage cap proposed to be fixed at? The mortgage cap mentioned by the UAE Central Bank sets the following financing limits: for expatriates, banks are allowed to loan 50% of the property value for the first property and 40% of the value for all second and subsequent properties. For UAE nationals, the limits are higher, allowing for 70% of the value for the first property and 60% of the value for the second and subsequent properties.
What will this mean for property buyers? If the UAE Central Bank directive remains in place, effectively, this means that buyers will be required to pay much higher down payments than in the past. This is a significant change from the previously available levels of financing. While until the new directive, there was not a uniform directive setting mortgage limits, banks offered financing for anywhere 70% up to 100% of the property value, with 85% as the common average. Under the new directive buyers will be required to have much more cash, which will inevitably prevent many investors from qualifying and therefore investing.
With the delay in the law taking effect, is it likely this proposal will ‘fizzle’ out? Too soon to tell. While the directive is official, many banks, along with industry members, are petitioning the UAE Central Bank to increase the mortgage cap or LTV to at least 75% of the property value. The UAE Central Bank has not yet made a final decision on the issue and, as such, the directive remains in place until it has been either formally amended or cancelled. In the alternative, it is possible that the UAE Central Bank will simply not enforce it. In the meantime, however, many of the U.A.E. banks are already suspending processing applications for mortgage loans until such time that a decision is reached by the U.A.E. Central Bank.
Why is a mortgage cap necessary at the moment? One school of thought justifying a lower mortgage cap is that limited financing will stabilise the property market by restricting the number of buyers and avoiding any repeat of the UAE's property bubble. This may especially be relevant for the local market, which has traditionally been driven by speculators.
Do you foresee another ‘bubble’ taking place in the UAE property market? It is highly unlikely that there will be another similar property bubble, at least not of that magnitude. While it is likely that the market will heat up again, any such growth will be much more contained. This is because, among other things, there are more regulations in place and less off-plan properties which can be repeatedly re-sold at artificially high prices. Also, overall world availability of financing has decreased, along with the investors’ appetite for wide exposure. There is, however, new interest coming from new markets, which will inevitably continue to stimulate the growth of the real estate industry.
What would be your advice to those who were going to invest in property but are now concerned they won’t be able to get funding? As a matter of first priority, we recommend that interested investors first objectively and realistically assess their financial standing. This should include safety measures to account for the change in financial capacity in the future, such as job loss. Investors should be prepared to service their mortgage in the event there is a temporary loss of monthly income. To that end, investors should focus on properties which they can realistically afford, as measured by their earning abilities, property values and financing terms. For those investors who are eager to proceed nonetheless, they should shop around for banks and assess the status of various banks to determine where they stand vis à vis the mortgage cap. In the event that the majority of the banks refuse to process mortgage applications, you will have to wait until such time when a decision has been reached by the U.A.E. Central Bank.
Pic credit: freedigitalphotos.net
ARE YOU concerned about the upcoming mortgage cap? Will this affect your investing in property in the UAE in the future? Let us know in the comments below!