Arabian Business' Shruthi Nair explains the Mortgage Cap rule that was introduced in the UAE in 2013. Most residents of the UAE are highly invested - at least emotionally, if not monetarily - in the countries real estate market.
In fact, Real Estate is one the main sectors that drives the country’s economy, with a GDP contribution of nearly 6%.
But are we aware of the major rules are laws pertaining to this sector?
At the end of October 2013 the Central Bank issued a new set of regulations on mortgage lending to banks and other financial institutions.
What really was the mortgage law?
The law defines the eligibility of various categories of borrowers based on a loan to property value ratio.
In the case of UAE nationals, for properties valued at AED 5 million and below, the LTV will be a maximum of 80 per cent of the value of the property. In cases where the property value exceeds AED 5 million, the LTV shall be 70 per cent of the value of the property.
For a second property, the LTV shouldn’t be more than 65% of the value of the property.
For expats, the LTV for properties less than AED 5 million is 75% and 65% if its lesser that 5 billion dirhams.
Now the maximum loan amount for the purchase of an off-plan property will be 50 per cent of the value of the property, irrespective of the nationality.
You may ask, why the government set such regulations back then?
To put it simply, it was an attempt by the Central Bank to regulate borrowing in the market by reducing the level of leverage that was available to borrowers and in the process, increasing equity in property investments.
Oh, on a side note, under Central bank laws, no more than 50% of your total income should be committed to paying off your debts including mortgage payments, credit cards, other loans etc. So if you earn 20,000 dirhams per months, you can only be paying 10,000 as EMI including interests.
Now, there are rumours in the market about relaxing these terms, hoping that the much needed rush on the properties market would come back.
I’ll let Aarthi from SHUAA capital explain why – use quote - “Back in 2013, Central Bank tightened the credit controls and imposed a mortgage cap, which was having a maximum LTV ration of 75% and for off-plan properties 50%. This was because there was a threat to the property bubble. But now there is a weaker demand and softening of prices in real estate, so the wider market expectation of course is there is a possibility to want the central bank to loosen the mortgage cap i.e increase the LTV ration 80-85%”.
Let me tell you again, that no directive regarding this has come from the Central Bank, whatsoever. This is just wishful thinking.
(Source: Arabianbusiness.com YouTube channel)