Financing real estate transactions became more difficult post the global credit crisis in 2008. Following the collapse of the credit markets, banks around the world tightened up on lending policies and reduced maximum Loan to Value (LTV) ratios, which now require buyers to put down larger deposits against new purchases. This has minimal impact for most affluent or high net worth clients but has hit the first time buyer’s market hard.
There has been so much talk lately about the UAE Mortgage Cap with experts weighing in on why it should be relaxed. In the UAE, the maximum Loan to Value for expats is 75%, providing it is a first mortgage and the property is valued under AED 5M. For purchases higher than AED 5M, the LTV reduces to 65% and 60% for all subsequent purchases. Therefore, your first time buyer has to find 25% down payment plus an estimated 7% of the value of the property to cover all fees for the transaction. A tough amount to swallow for many prospective buyers.
What can be done to come up with the funds to complete your purchase?
Leveraging existing property
If you have existing property in the UAE or overseas with little or no mortgage, you may be able to refinance and release cash (equity release) to fund your down payment. This is an excellent way of making your existing assets work harder for you. For example, if you have a property in US, which is tenanted, while you are working overseas, you can secure a USD or AED mortgage up to 75% of the value of the property and repatriate the funds to the UAE to use as deposit. An additional UAE mortgage can then be taken against the new purchase, which is then funded by both mortgages. This is acceptable, subject to the buyer’s affordability. Always make sure to check with your bank or mortgage consultant before taking this route because per Jean-Luc Desbois, Managing Director of Home Matters Mortgage Consultants “Customers wishing to adopt this strategy should be mindful that some UAE banks and lenders will not accept equity released funds from an existing property as down payment, as these banks have interpreted the UAE Central Bank Mortgage regulations differently to others.”
Leveraging against investments or cash
This strategy is used by high net worth clients through Private Banking arrangements. Many expats chose to maintain wealth offshore in financial services jurisdictions, such as Switzerland or the Channel Islands. While interest rates remain low, it can be beneficial to borrow against a portfolio of stocks and shares or bonds, which offer the potential to outperform the cost of borrowing. For example, a conservative investment portfolio may offer modest returns of 5-6% per annum, while borrowing costs are below 2%.
Many expats also sign up to longer term regular savings plans to maximize their offshore, non-tax status. These investment plans can also be used to leverage against. Loan to Value ratios against investment portfolios will depend on the underlying assets. Lower risk investments such as bonds or fixed interest securities will have higher LTVs than portfolios of emerging market shares for example, due to the volatility of the assets.
Personal Loans are not allowed for down payments
The above regulations are clear that neither banks nor borrowers should engage in providing or taking personal loans for use of down payment. This is different to leveraging (borrowing) against an existing property, as personal loans are unsecured debt, which means there is no security or collateral used to ensure the loan is repaid. This represents higher risk to the lender as the borrower has no collateral at stake in case of default. Personal loan repayments are restricted to a maximum term of 48 months or four years in the UAE, so the monthly repayments are much higher over the shorter period than borrowing the same amount over the term of a 25 year mortgage. Due to the higher risks associated with personal loans, the interest rate charged is a lot higher than mortgage rates. Do not get sucked into the trap of misinterpreting published “flat rates” as good value. They are not transparent and the actual interest paid over the term is much higher than interest calculated on a reducing balance basis.
Inflating purchase prices is a bad practice of the past
Before greater regulation came into the market a minority of buyers, sellers and agents would create purchase contracts with inflated prices to gain higher loan amounts from the banks. This is fraud and there are several measures and checks these days to identify such practices. Banks will provide maximum LTVs on the purchase price or valuation, whichever is lower. Hence, there is no point in inflating a purchase price, as it will not value up and the bank would then lend on the lower amount.
Personal Loans are accepted for paying property purchase fees/costs
Personal loans can be used to pay the estimated 7% transaction or purchase costs. In Dubai, the costs of buying a Freehold property are; 2% Real Estate Broker Fee, 4% DLD Transfer Fee, 0.25% Mortgage Registration Fee, AED 4,000 Registration Trustee Office and Bank fees, which vary from bank to bank. These can be financed via personal loan, providing the buyer is eligible and has the down payment from savings. Several banks offer both the mortgage and personal loan for fees these days but insist on salary transfer. Again, some banks are averse to this and personal loans can be difficult to obtain, particularly if the applicant works for a small, unlisted company or is self-employed.
Gifts from parents or family
These can be used as down payments. However, banks will not accept loans (interest or interest free) from family. Most lenders will also ask for a letter from the family member and proof that the funds are not from a personal loan.
In summary, there are ways to get funds for your purchase but always follow the simple rule of thumb – buy what is affordable in terms of monthly repayments and deposit. For expert mortgage advice and exclusive discounted rates, contact Home Matters Mortgage Consultants, UAE’s oldest and number one mortgage consultant at 800 MORTGAGE (800 66784243).