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What the new cap on UAE mortgages mean for you
Souqalmal.com explores how the central bank’s mortgage caps will affect the market and individual buyers.
November 11, 2013 9:44 by kippreport
Last week the UAE Central Bank announced new guidelines for home loans. The move, which has been anticipated all year, will see expat buyers limited to borrowing 75 per cent of a property’s value for a first investment of under AED5 million and UAE nationals limited to 80 per cent.
For homes worth more than AED5m, there is an even more significant change. Expats will only be able to borrow 60 per cent of the property’s value and Emiratis 65 per cent.
The cap regulations do not stop there. For second and subsequent home purchases, lending for expats will be limited to 60 per cent and for UAE nationals the loan-to-value ratio is 65 per cent.
Finally, when it comes to off-plan properties, all buyers – regardless of nationality – will only be able to borrow 50 per cent of a property’s value.
The other significant announcement is that loan lengths will be limited to 25 years and age will be a restrictive factor too. Expat borrowers must be no older than 65 years at the time of the last repayment, while UAE nationals must not be older than 70 years.
The new regulations, announced last week, did not come as a surprise. The cap was first discussed at the end of last year with a central bank proposal to limit loans to expats by 50 per cent and Emiratis by 70 per cent. This information was not favourable to the banking industry and investors, prompting the central bank to reconsider.
This second set of requirements is expected to come into force in the next month, a move that will have a significant impact on the mortgage and property markets.
So what does this mean?
Firstly, for the banking industry, it sends clear signals that lending will be more regulated to prevent the same mistakes made in the past.
Back in the boom period of 2008 to 2009, when house prices hit their peak – banks were lending freely, with some 90 per cent mortgages available. It allowed buyers with limited capital to invest in numerous properties and flip them soon after purchase in order to make quick profits – driving up prices at an alarming rate.
Under the new guidelines, banks will have to be much more careful about whom they lend to and the central bank has made it clear that repayments on home finance cannot make up more than 50 per cent of a person’s monthly income. They must also limit lending time to no more than seven years of a customer’s income for expats and eight years for Emiratis.
All these are good moves, because it will help prevent lenders from issuing bad loans to borrowers who don’t have a hope of meeting the repayment requirements. It will also make the mortgage market more competitive, encouraging banks to offer better deals, in turn encouraging investors to shop around for the best home loan, comparing all the mortgage options available.
There will also be consequences for the property market. There could be a property price slowdown, as investors are prevented from buying, because they need to raise more cash to put down a deposit on the home of their choice. That being said, a full-scale slowdown is unlikely considering that based on statistics, 80 per cent of the property transactions are made in cash, which means regulations will really only affect 20 per cent of the transactions in the UAE. With lending so limited for off-plan properties, it will deter the casual flipper looking for a fast return by leveraging their purchase without the need of a big amount of capital. While it may be harder to get on the property ladder, the UAE’s housing market could become more stable and, in the long-term, a safer bet.
Fears that the nation’s property market is about to experience another bubble may finally be put to rest. The new rules should be considered a safety measure that, ultimately, will protect banks and property buyers from the recent property boom, particularly in Dubai. Prices have risen by 20 per cent in this year alone and nobody wants to return to the dark days of the downturn.
Ambareen Musa is founder and CEO of Souqalmal.com. Having moved to the Middle East region in 2008, Musa worked as a consultant for Bain & Company Middle East and focused on the financial services sector, before joining MasterCard Middle East and Africa to set up its consulting arm, before leaving two years later to become founder of Souqalmal.com in 2011.