Financing property in the UAE

Today’s newsletter is not about a hot investment area or product. However optimal financing is essential to maximise returns on your investment.

It used to be easy to finance a large percentage of your property in the UAE. In the past we had financed properties 100%. We used a mix of mortgage, equity release and personal loans. This is not anymore possible. Rules have become stricter several times since the Global Financial Crisis of 2009.

If you are a UAE resident expat and you buy a completed property, you can finance up to 80% if it is your first property. Your second and subsequent properties can only be financed up to 60%. Until end of January, you could include the fees and commissions (=4% for Dubai Land Department and 2% for the agent) in the financed amount. Now you need to have 27% (including about 1% financing related fees) of the value of your property in cash if it’s your first and 47% if it’s not your first property.

We are working on a home loan estimator which will estimate the amount of home loan you can get based on your income, existing debt burden and property value. It will become available on our website shortly. Stay tuned, we will announce it on social media and on the next newsletter once available.

The rules around financing property in the UAE have two components:

1. Central Bank rules; and

2. Policies of the lender

Central bank rules define minimum requirements banks have to adhere to. Those include things like:

• maximum Loan to Value ratio

• maximum tenor

• maximum debt burden ratio

• what counts as eligible income

We have detailed the most important rules at the end. You can find the complete Central Bank rules here:

Bank policies can differ from lender to lender. Documentary requirements for example are determined by bank policies. Banks can also apply stricter limits than those of the Central Bank.

Age restriction

Most UAE banks limit the tenor of mortgages to the 65th birthday of the borrower. This is the legal retirement age in the UAE. Only few allow mortgages up to the 70th birthday and with special approval potentially even longer. In case of a joint mortgage, the age of the older one is the limiting factor. If you are married and you both are working, it can be beneficial to have the mortgage in the name of the younger partner.

Eligible income

The borrower’s salary is the most important part of the eligible income counted towards your Debt Burden. The Central Bank also allows 83% of rental income to be used as eligible income. Some banks however restrict contribution from rental income to a much lower value unless the property is managed by them.

Credit card impact

The debt burden from credit cards is calculated differently by different banks. Some would take between 2.5% and 5% of the total credit card limit. Others apply 5% to the actual outstanding balance at the end of the month. If you have several credit cards, this can substantially affect the amount you can borrow for your property purchase. A credit card with a 40k limit can reduce your eligible mortgage amount by up to 300k. If you have 3 of them, you're down almost a million. Reducing your credit card limits and your outstanding balances can help.

Policy matters can be waived in certain circumstances. We rarely financed a property that didn’t need at least some waivers. It’s important to work with a competent mortgage professional. A good mortgage person (i) informs you which waivers are possible and (ii) ensures you get them in time. Because timing is always an issue. Financing often delays transactions. I have even seen transactions fall apart just because the financing took too long.

Mortgage pricing overview

Below is the interest of some of the common mortgage lenders in the UAE. Please note that interest is not the only cost factor. There are also a number of fees such as arrangement fee, pre-payment fee, life insurance etc. Some lenders allow offsetting part of the outstanding loan amount with cash deposits to reduce interest. Also, the lowest cost is not always the best for everyone. Other terms, such as age limit and rules around eligible income can also play a role.

Note: The above information is based on what we found on the lenders’ websites and from calls with customer service. It neither includes all lenders, nor all available offers of the above lenders. In some cases salary transfer or a specific customer status is required to get the best pricing.

Should I use an independent mortgage adviser?

I personally have never used one. There is only a small number of banks in the UAE and it doesn’t take very long to check their websites or give them a call to check their home loan terms. If you have a good mortgage person directly at the bank, it can make it easier to speed things up and push for waivers and special approvals. We have in recent years found FAB had the best terms for us and we have a very competent adviser there. Happy to introduce you (just reply to this email). However, you should first see whether they have the best terms for your specific situation.

Can I get a mortgage without working in the UAE?

Banks like salaries best when it comes to eligible income. However, you don’t need a UAE salary to finance a property in the UAE. Some lenders accept to finance based on rental income alone. If the property is bought vacant or for financing at property handover some banks even use expected rental income.

Can I refinance properties in the UAE?

Yes, you can refinance. This makes sense if you find a bank offering you substantially lower interest. You need to take into account the cost of pre-paying the existing mortgage, the mortgage deregistration and re-registration costs at DLD as well as the arrangement cost of the new bank. If after taking these costs into account, the offer of the new bank is still much better, go for it. Sometimes banks have offers to reimburse some of the costs for mortgage buyouts. Often your existing bank makes you a counteroffer matching or coming close to the offer of the other bank. Then you save yourself the hassle.

Can I take money out from my mortgage when my property value has increased?

Yes, you can top up the mortgage if your property value has increased. However, you don’t just get the money into your pocket. It has to be used to buy another property which is not otherwise financed. This can be useful to pay for an offplan property. Once the property gets delivered you can then still take a mortgage, just not at the same time as taking the mortgage top up.

Here is a summary of the Central bank rules - those are non-negotiable:

I. Maximum Loan amount

The maximum amount you can borrow is determined by the following components:

i. Value of your property

The bank has to consider the lower of

• your purchase price; and

• the value determined by a valuer.

Banks used to add the transaction fees (4% Land department fee plus 2% agent commission) to this amount. However since February 1 this year, the Central Bank does not allow this anymore.

ii. Loan to Value (LTV)

LTV is the percentage of the property’s value the bank is allowed to finance. The permissible LTV depends on the property, your nationality and whether or not it is your first property. Please see below the Central Bank limits:

iii. Your Debt Burden Ratio (DBR)

Banks need to ensure that after you take the loan, your total debt burden is no more than 50% of your eligible income. I.e. if you make 20k per month, the total amount you pay for all your loans together should not be more than 10k per month.

iv. Your eligible income

As eligible income banks count your guaranteed gross salary excluding bonuses plus any regular income like e.g. rental income, annuities, etc. For rental income, you can only count 10 months of income per annum (~83%).

v. Other indebtedness

If you have other loans or credit cards, the bank will consider any monthly loan payments as existing debt burden.

II. Other restrictions

The mortgage loan cannot be more than 8 years of income for UAE Nationals and 7 years for expats.

The maximum tenor of a mortgage is 25 years. Many banks lend no longer than to the 65th birthday of the borrower. However, this is not a Central Bank rule. The Central Bank prescripts no age limit of the borrower.

The borrower’s equity is not allowed to come from other forms of borrowing (personal loans, credit cards, etc.).

Banks are allowed to offer loans with deferred principal repayment. However interest only periods cannot be longer than 5 years.

For off-plan units, the bank is only allowed to disburse the mortgage loan if:

1. The payments are based on construction milestones; and

2. The borrower has already put his 50% equity.

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In case you have missed any of our previous issues:

• Dubai islands: One of the hottest seafront opportunities

• Dubai South: Dubai strongest growth engine

• Villas and Townhouse: Land is getting scarce

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