Saturday, 30 August 2008 |
17:03 UAE time
Growing consumer confidence in a booming real estate sector means Dubai's mortgage market is set for explosive growth.
Already growing at a rate of 50% year on year, its success is a reflection of the number of expatriates choosing to buy their dream homes in the emirate.
For most of those expatriates taking a mortgage is the biggest financial decision they will ever make - and without the right guidance to help them choose the right one it could be their biggest mistake.
In this feature we reveal how to pick the best from what's on offer in the Dubai mortgage marketplace - and how to survive the application process.
Your options
In Dubai your choice of mortgage provider is limited to those which have arrangements with the developer of the home you are purchasing.
Unlike in many countries where you can apply for finance from any provider regardless of the property you are buying, banks in Dubai will only finance certain developments.
In the case of the properties built by the three main master developers - Emaar, Nakheel and Dubai Properties, the majority of banks and financial institutions provide mortgages or home finance.
However, when buying a property built by a smaller private developer it can be difficult or even impossible to get a mortgage. Chris Allen, an independent mortgage broker with Sphere Mortgages, part of Sphere Global Property Solutions, explains: "Because Emaar, Nakheel and Dubai Properties are all government-owned all the lenders provide mortgages for their developments.Underneath that the largest independent developer here is Damac, and there are only around three banks currently lending to Damac Properties. Then there are lots of other smaller developers who go into arrangements with certain lenders."
The biggest mistake buyers can make, he says, is to sign a contract to purchase a property from one of those smaller developers without first checking that they are able to get a mortgage for that property.
"There are lots of properties out there without any lenders attached to them. I get loads of people contacting me saying they are buying a property and then they tell me which one and I tell them there is no one available to finance that property. And there really isn't a lot you can do about that other than sell the property straight away."
While the system may sound limiting it is worth remembering that around 70% of the property market in Dubai is made up of Nakheel, Emaar or Dubai Properties developments. The system provides some peace of mind for buyers in that banks generally will carefully assess developments before deciding whether to finance them and will not provide loans for any that appear risky.
Nabil Abou Alwan, head of marketing and product development at Tamweel says this means his organisation acts as a "screening agent for the end user".
"We automatically approve the master developers because they have the track record, the finances and we know they will deliver. The other developers go through a risk assessment review by Tamweel.
"They first have to apply to Tamweel, then we screen the project and evaluate it then evaluate the developer itself - its track records, financial capability, its ability to deliver and who they are commissioning as a supervisor and a consultant on the project. We also look at the contractors they are dealing with, the land they have, what they intend to do with it and what kind of development they are building."
Suvo Sarkar, Group Head of Retail Banking at National Bank of Dubai, which has approved 15 developers in Dubai, says: "We follow a strict process before financing a developer. One of the key risks that we perceive in this market for the customer is really the developer risk. And banks and finance providers have a key role in giving customers a sense of confidence by carefully selecting the developers they work with. We are very selective and we look at the developer's history in terms of what kind of business they have been in the past, what kind of developments they are getting into, how good their financials are, what kind of parentage they have in terms of the holding company. Basically what we want to know is whether they will complete the project when they say they will - and whether the construction will be of a high enough quality." For those buying properties from the three master developers there are mortgages from around 18 lenders to choose from - whereas those buying from tier two or three developers may only have a maximum of three to select from.
The deciding factors
When choosing your mortgage, say experts, the five main factors to consider are: The size of the loan - or loan to value ratio - that is being offered; arrangement and processing fees; interest rates; early settlement penalties and insurance. Customers also have the option of selecting a conventional or a Sharia-compliant mortgage. The latter is a very popular choice with Islamic financing providers Tamweel and Amlak dominating the mortgage sector in the UAE with an approximately 70% market share.
It is not the cost of an Islamic home finance that makes it different to a conventional mortgage but the way in which it is structured and the fact that customers do not pay interest but a profit rate that is incorporated into their repayments.
Ijara Islamic home finance works as a form of leasing agreement in which the mortgage provider purchases the property in its name then leases it to the customer who assumes full ownership once all the mortgage repayments have been made.
Murabaha is where the bank buys a property then resells it to the customer at a fixed profit rate. The customer pays the bank back in fixed monthly installments.
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