Time to rethink the mortgage cap
Last week’s announcement on retirement visas was the latest in a raft of welcome measures taken by the UAE government in recent months which have helped bring greater certainty to residents and have bolstered confidence for buyers. Increased government spending, 100% foreign ownership for businesses and 10 year visas demonstrate the governments commitment to long term sustainability and support for the real estate market. But in a market facing head winds from rising interest rates, large scale supply and the strengthening dollar price, the most positive step the government could take to stimulate demand would be to loosen 25% mortgage cap.
The mortgage cap, which limits Loan to Value rates for expats to 75%, was introduced in 2013 as the government and central bank took steps to manage debt exposure and curtail the types of irresponsible lending which caused the financial crash of 2008. But the 25% cap has had an overly repressive impact on the secondary market, pricing out many potential buyers, especially first time buyers, while fueling demand in the off plan market where upfront costs are lower, typically 10%. The 25% deposit requirement has created an imbalance within the market with the cash rich benefiting from lower demand from the average person, and it can be the cause for the over inflation of prices as buyers try to find creative ways to get around it. And while the 25% cap is intended to protect banks against the inherent dangers of lending in an unstable market, the cap itself is a barrier to the sort of end user, domestic demand that creates stability and maturity within the market.
Domestic, end user demand is on the increase and that is a great thing for a long term sustainable property market and the UAE as a whole. First time buyers and families are taking advantage of recent price falls and low interest rates to purchase a home and put down deeper roots in the Emirates. This can be seen in the growth in mortgage loans in 2018, up 26% year on year, and at Betterhomes we are seeing an increasing trend of tenants looking to buy their own property. However, much of this potential demand is not being realised due to excessive deposit requirements. The average buyer needs a 25% deposit plus 4% for DLD fees, and once you factor in commission and mortgage arrangement fees, the upfront costs rise to approximately 33%. An amount which is just too high for many.
According to Jonathan Mortgage, owner of MENA Mortgages, “The single biggest reason that ex-patriates do not buy property is due to the amount of deposit needed to secure the mortgage. We regularly meet potential buyers would could very easily service mortgage repayments but they do not have the upfront funds to purchase a property despite having very good amounts of savings.” And with high rental costs many buyers, especially first time buyers, become tapped in this situation.
I welcome sensible controls on lending and I remember all too well the consequences of irresponsible lending on the global economy. I would recommend any loosening of mortgage rules be taken carefully and responsibly, but I would urge that the time is now right to review the current level of the cap as global financial institutions have developed more effective ways to ensure borrowers are able to afford repayments. In the UK, for example, the Mortgage Market Review (MMR) of 2014 brought in more stringent affordability checks on buyers and “stress testing” against future interest rate rises to reduce risk in the mortgage market without imposing a strict cap on LTV rates.
Dubai is building a city for the future and the government have taken steps recently to stimulate business and demand but nothing would be more effective that reducing the deposit requirement for end users. There are 56,000 new properties in the pipeline for Dubai alone by 2020 and a 10% reduction in the deposit requirement for expats would open up homeownership to a huge number of people who would be further encouraged to buy a home and put down roots here in the UAE.
Source: Property Weekly
Words: Richard Waind, Director of Brokerage, Betterhomes