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.
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.
Islamic finance providers also offer Istisna'a for customers who are constructing a property. The bank takes on the construction of the property then sells it back to the customer once it is complete.
Another important difference - and one which makes an Islamic mortgage attractive to many customers is the fact that those buying an off-plan property that is still under construction do not have to make any payments until the property has been constructed. This means that in the event of a delayed construction they do not - as in the case of many conventional mortgages - have to pay interest on scheduled payments that have been made to the developer by the bank.
There are a few banks that offer no early repayment penalty at all while others charge anything between 1% to 3% for partial payment or full repayment of the loan.
Alwan says: "When you buy an off-plan property with Tamweel you only have to make the down payment to Tamweel then nothing else until you take delivery of the property. With conventional banking customers would have to start making interest payments even if the property is not delivered yet."
Loan to value ratios
Generally in Dubai the maximum mortgage given is US$1.36m (AED5m) and the loan to value ratios, the percentage of the value of the property that the bank will fund, reach a maximum of 90%.
For properties that are bought directly from the developer, banks will provide a mortgage that is a percentage of the original purchase price. But for properties in the secondary market, the bank will conduct its own valuation using an independent valuer.
Allen explains: "You could buy a property from an estate agent here and pay US$544,000 (AED2m) but the valuer may say it's only worth US$517,000 (AED1.9m) so the bank would take that figure and work out 90% of that in order to calculate your mortgage. If it's being bought directly from the developer though the purchase price is usually accepted by the bank."
Some experts say customers should be wary of mortgages which offer very high loan to value ratios - as these may be compensated for with high interest rates or processing fees.
Omar Asghar, marketing director of Mashreqbank's affluent segment, warns: "There are banks in the market that will offer a really cheap mortgage which can look very attractive to the customer. But customers should be aware that they will often compensate that with a really high processing fee, or they may be very stubborn about early settlement fees."
Arrangement and processing fees
Arrangement fees are set by UAE banks at around 1% of the value of the mortgage - although this can vary, according to Peter Lee, an independent mortgage broker of Independent Finance in Dubai.
"Generally these days the arrangement fees are anything between 0.5% and 1.25% of the loan amount. And some banks will have a special promotion with a maximum cap on arrangement fees - for instance Abu Dhabi Commercial Bank charges a maximum of US$2,720 (AED10,000) for properties bought in the secondary market," he goes on to say.
Although most banks will be transparent about any processing or arrangement fees providing these to customers from the outset, Allen advises that it is not always possible to predict exactly what additional expenses will crop up during the process and claims customers should in fact set aside 10% of the purchase price for hidden costs.
"I would say put 10% of your purchase price aside for hidden costs and fees. And that's being generous - you do need a bit of money in the bank because you don't always know what will crop up," explains Allen.
In the UAE as in many other parts of the world it is mandatory to take out life insurance when purchasing a mortgage.
This is so that the mortgage is covered should the person in whose name the property is registered dies.
"Life cover provides a facility whereby if something happens to the owner of the property, then the loan is repaid rather than the burden of the person's debt being passed on to their next of kin," says Maggie Timoney-Giles, mortgage sales manager at Lloyds TSB.
Banks will offer insurance alongside the mortgage however customers are free to go elsewhere for their insurance policy - or to use an existing policy they hold to cover the mortgage.
"The banks generally will provide in-house insurance and they provide it as part of the package. It's not mandatory though and the customer can take another policy as long as it has been approved by the bank," says Lee.
He warns however that some banks will charge an exit fee to customers who choose another insurance policy other than that provided by the mortgage lender.
"This can involve an exit fee that can be anything between AED2,500 and AED5,000," he warns.
Customers should look carefully therefore at the terms of a bank's life insurance policy and the premiums they would pay when selecting a mortgage - as well as finding out what exit penalties exist if they choose to go elsewhere.
The interest rates set by banks in the UAE for conventional mortgages vary from around 7.25% to 9%, according to Allen. Generally these are variable rates - with fixed term rates offered by a handful of banks, but usually only on a temporary basis.
Allen explains that it is possible to negotiate a more favourable rate with the banks by taking out a mortgage with a lesser loan-to-value ratio and by fulfilling certain conditions. "The less you are borrowing loan-to-value wise, the best interest rate you will get. Also there are instances where they might knock some interest off.For instance, the headline rate might be 8% but if you bank with them, put your salary with them or take their insurance you might get a better deal."
Some believe that given the fact that interest rates vary little among the different banks - they are not usually a deciding factor in a buyer's decision.
Noushad Thotton, mortgage manager at Sherwoods Independent Property Consultants says: "The interest rates probably average out between 8 and 8.5% from bank to bank so that means it's not a big criteria when it comes to choosing a mortgage."
Early settlement penalties
However, experts agree that one factor which can make a big difference between one mortgage product and another is early redemption penalties.
There are three scenarios in which buyers could have to pay these early redemption penalties - if they pay the loan off early, sell the property before paying off the mortgage or transfer the mortgage to another bank.
And as Lee explains the penalties charged by the different banks can vary considerably.
"There are a few banks that offer no early repayment penalty at all while other banks normally charge anything between 1% to 3% for partial payment or full repayment of the loan."
Timoney-Giles adds: "The redemption penalties really can be a deciding factor as they can rise to as high as 3% of what the buyer originally borrowed. And if you're talking about a mortgage worth US$544,000 (AED2m) - that is a lot of money."
The extent to which early repayment penalties matter to a customer depends on their circumstances. For investors and speculators hoping to make a fast buck from buying then selling property in quick succession early penalties make a big difference. However, for those planning to live in their property long-term - this would be less of a concern.
"If you're somebody who is making short-term bets on the Dubai property market then that's very important," says Owen Bellman, head of Standard Chartered Bank's consumer banking division for the UAE and Oman.. "Whereas if you're a person who is buying a house to live in then that's not necessarily very important. It really depends on what your mindset is when you buy the property."
Mortgage brokers strongly advise their expat clients to think carefully about how long they intend to remain in the UAE before selecting a mortgage.
"Over here there are a lot of expats and people tend to take loans where the lifetime of the loan is around five years," says Lee. "But many of them will want to purchase a property, live here for just three years then sell it and go home.In those cases looking at the early repayment penalties attached to a loan is probably their most important consideration."
What makes this even more important is the fact that some lenders will charge a higher penalty if the buyer sells a property early on in the tenure of the loan - but may reduce the penalty or even cut it out altogether for those who retain ownership of the property long-term.
This is the case for example with Tamweel as Alwan explains. "Typically the exit fee would be higher in the earlier years of the loan. For Tamweel once you've lived in the property and you've started making repayments, the exit strategy is easier as we know you are not just a speculator, you are in fact a genuine customer," he goes on to say.
Meanwhile Asghar says that Mashreqbank will waive early settlement penalties altogether for customers who retain a property for three years.
While financial considerations are crucial when selecting a mortgage, experts agree that the service the lender provides you with during the application process, and over the term of the loan, is equally important.
Allen goes so far as to say that this should be customers' top priority above factors such as early repayment penalties and processing fees.
"Service should be the number one consideration. There's not always a great deal to choose between interest rates and early redemption penalties so service counts for a lot. In my experience this can vary a lot and one of the worst examples of poor customer service is when the banks don't even bother to return your calls."
Here the banks are very, very choosy about who they lend to and they take all the references that they possibly can.
Sarkar adds: "The most important thing to take into account, which we hear time and time again from customers is the service factor. Mortgages constitute a very long-term association with a bank and buying a house can be a very emotional decision. The customer needs to know that the bank will do things in the time that they say they will and that they are transparent in their pricing and that there won't be new hidden charges once you have signed on the dotted line," he adds.
Chris Balfour, head of personal banking, Middle East at Lloyds TSB, says that customers should be able to gauge the service levels of a mortgage provider right from their first meeting with an advisor there.
He says: "Warning signs include confused explanations, people who don't follow up in the way they said they would and evasiveness around what further charges might be introduced further down the line. There have been more than a handful of people in this city who have had their fingers burnt by lenders who've changed the conditions of loan and introduced terms and conditions that weren't in the original agreement. You need really crystal clear explanations about what happens in situations such as you selling the property and if you don't get that then look elsewhere."
The application process
The time when the bank's service levels are the most important are during the actual application process which can be long, complicated and fraught with delays.
To apply for a loan, applicants must be aged between 21 and 65 and must have been employed full-time for at least three years and the person's sponsoring company must have been in operation for at least three years.
In order to apply for a mortgage the customer's property reservation should have been approved by the property developers and management company.
The usual procedure is for the customer to contact the financing company linked with the property that they wish to take a mortgage from, agree on the financing details, submit all documentation and sign any paperwork. Then once a 5% holding deposit has been paid the application is processed.
Paper work required by the bank includes the customer's passport and labour card - both original and copies, salary certificate, bank statements for the last six months, letter from your bank confirming there are no outstanding loans and a registration form from the developer.
While some lenders - including Mashreqbank - say the time they take to turnaround a loan application can be as little as a week - Allen claims this process can in actually fact take many months to complete.
"The quickest I've done was 10 days but the worst was ten months."
He explains that although this can be a lot to do with the efficiency of the bank it is also affected by the circumstances of the actual client and the risks associated with lending to them.
Banks are, he claims, very rigorous in their selection procedures and favour clients that are in stable jobs with a steady income - as opposed to self-employed customers or those who are paid on a commission basis. "The banks here are very, very choosy about who they lend to and they take all the references that they possibly can; bank statements, bank references, company references and even credit references. The process is similar to that in countries such as the UK but many of the lenders are new to the market so they are more cautious. It can be difficult to secure a mortgage for people who are self employed on commission or get paid bonuses."
This is not the case with all banks however. United Bank Limited (UBL) for instance grants mortgages to both salaried and self employed customers with the eligability of the latter based on their company's profitability and financials for the past two years.
Alwan admits that Tamweel's selection process is indeed "highly meticulous" and that the organisation favours clients with a steady income stream.
"We need to assess the person, his income, how stable it is, how long he has lived here and how long he plans to live here. We then assess this in relation to the property he has chosen."
Sanjeev Saxena, head of wealth management and private banking at RAK Bank adds: "A mortgage is a very long term lending arrangement spanning up to 25 years and here there is a big expatriate population that tends to come and go so the selection process banks have is rigorous. But if you are able to provide some very simple documentation then it is not difficult."
Given the extent to which banks scrutinise customers' mortgage applications, experts highly recommend clients to seek pre-approval from a mortgage provider before even signing a contract for a property.
Pre-approval is where a bank agrees in principle to finance a person's mortgage -stating the amount of the loan they could provide.
This gives customers the chance to select a property based on the amount they can afford and prevents a situation where a customer registers for a property, pays a down payment then finds out they are not eligible for a mortgage.
"A pre-approval from the mortgage provider should be sought before finalising the property agreement, signing an MOU with the developer or putting down a down payment," says Thotton. "Because you never know whether you are eligible for a mortgage and what factors might stand against you. Even a small matter like a cheque you wrote once that bounced can have a huge impact on your case."
Adopting such a cautious approach seems to be the key to success when it comes to taking a mortgage, both in terms of making the right choice and surviving the application process.
A mortgage is a major financial commitment and while it could secure a person's financial future the wrong choice could be disastrous.
But the future is optimistic for UAE homebuyers with more lenders expected to enter the market, creating a more competitive environment with better rates, more choice and lower charges for customers.
And while proceeding with caution is advised - growing consumer confidence means more and more of Dubai's residents are now buying into the emirates' mortgage marketplace.
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