Why do you need One Stop Mortgage Brokers?

There are buyers who start shopping for a home without getting pre-qualified and pre-approved. The seller knows nothing about their income and credit status and as such cannot make out as to how much they can invest in a home. But if you get pre-qualified with a broker or lender before seeking a home, you can convince the seller of your ability of getting a mortgage loan.

A letter from the lender to the seller can further improve your chances of getting the home of your choice.

Why are home loan rates in the UAE such a rip-off?

Let us start with the international banks lending in the UAE mortgage market. Why is a customer in the United Kingdom paying 6.75 per cent for a home loan – which means the bank is earning a margin of 1.25 per cent above the base rate – while a mortgage in the UAE will cost 8.25 per cent, a thumping 4.75 per cent margin above the local discount rate? That means an international bank has a profit margin on mortgages in the UAE that is three times higher than in the UK. To be fair, these global giants are not alone.

All 23 UAE home loan lenders charge similar interest or profit rates for mortgages on residential property. But the smaller lenders can at least argue they have a higher cost base and the global giants are just profiteering in an emerging market.

Some 90 per cent of home loans in the UAE are adjustable rate mortgages, where the interest rate is adjusted according to indices such as the London Interbank Offered Rate (Libor) or the Emirates Interbank Offer Rate (Eibor). Currently, interest or profit rates in the UAE stand at Libor or Eibor plus 400 to 500 basis points.

The UAE mortgage or profit rates have not been adjusted since the US Federal Reserve started cutting its base rate last year. Only last week there was a cumulative 1.25 per cent cut by the Fed, and the UAE Central Bank followed suit immediately. Did the local home loan companies jump to cut their rates?

Far from it and with good reason: banks like to be slow in reducing rates and quick in raising them to squeeze extra profits out of borrowers. Smaller home loan companies can argue they have to raise funds through mortgage-backed securities and not the inter-bank market, and yes this is more expensive.

But surely this is all a question of degree: what is sound business profit and what is a rip-off? Surely it is in the mortgage companies’ long-term interest to keep home loan rates as affordable as possible to grow their market?

Investment bank EFG-Hermes has published a study of the nascent UAE home mortgage market, which points to a 10-fold growth from $4.4billion (Dh16bn) today to $44bn by 2012. The implications for the development of the real estate markets in the UAE are enormous both in terms of expanding the market to the widest ownership as well as for selling prices. The study concludes the existing local mortgage market leaders, Amlak Finance and Tamweel, are both likely to lose mortgage market share to other local and international banks, although both companies clearly have huge scope to expand their business in the five-year period.

You have to wonder why, with 23 lenders in the UAE home market, one bank or mortgage company has not yet chosen to take the lead and slash home loan lending rates, or profit rates as they are known by Islamic lenders. At the moment, Amlak and Tamweel are competing to provide the fastest approval of loans – one hour or 48 hours, respectively. Why not compete on the actual mortgage or profit rate?

In the UK, banks such as HSBC proudly battled the competition by offering keen mortgage rates that are currently only 1.25 per cent above the base rate. A couple of years ago it might have been reasonable to argue the mortgage market in the UAE was small and so institutions needed to charge more to cover their costs.

But mortgage lending is a very profitable business today. Amlak has posted profits of Dh301 million for 2007, an increase of 131 per cent over 2006, according to preliminary financial results. Tamweel has posted a net profit for 2007 of Dh451m, an increase of 195 per cent compared to 2006, a figure that excludes the Dh699m of income from IPO proceeds. This is the third consecutive year that Tamweel’s net profit has increased three-fold.

The implication that UAE mortgage companies are making excessive profits at the expense of mortgage borrowers is clear enough. Perhaps in a still small but growing market such as the UAE, a 200-basis-point margin would be justified. But 400 basis points is quite outrageous.

It is also not good for the development of the local real estate sector, because the cost of finance is being kept artificially high and distorting the development of the market. Fewer people are able to afford homes as a consequence and landlords can, therefore, charge higher rents from people who have no choice but to rent.

Perhaps free market competition, or intervention from the UAE Central Bank will sort out this hiccup in the development of the local property market. But at the moment home loans in the UAE are a big rip-off.

Banks respond to call for cheaper mortgages

The point was that mortgage rates for borrowers had remained the same even after the Central Bank started to reduce the base rate last year. However, in any market it always pays to shop around before buying and mortgages are no different. One reader drew my attention to the competitive mortgage rates being offered by some fairly new entrants such as the Commercial Bank of Dubai, which start from five per cent, compared to the lowest profit rate of 7.5 per cent offered by major players.

This CBD mortgage is an adjustable rate fixed at 2.1-2.2 per cent above Eibor, which is presently 2.9 per cent. To qualify for this rate you will need to have high income with no other loan commitments and at least a 10 per cent deposit.
This means a Dh4 million loan over 25 years will cost around Dh26,000 per month, including capital repayments. This is enough to afford a three-bedroom villa and is cheaper than renting at the present time. Of course, rents might fall below mortgages and the capital values of homes could go down as well, but this is a good starting point for a homeowner in Dubai.

It also makes buy-to-let a realistic business proposition in Dubai, and the CBD is prepared to take rental income into account when assessing your income for loan purposes. CBD also offers a fixed processing fee of Dh10,000 on properties above Dh1m and no early redemption penalties.

On the other hand, a major international bank charges a stiff penalty of four per cent on early repayments and, as you never know when you might want to repay a loan, this is something to keep in mind. But demand for mortgages is so high in Dubai that there is plenty of business for all the home loan providers and some of the better deals are not being marketed hard as the departments are already overwhelmed with applications.

Emirates NBD, introduced its Offset Home Loans last September and is also reckoned to have some of the best mortgage offers. In the Emirates NBD plan, the outstanding is offset by credit balance on a parallel current account. Effectively you can use income and any other cash you wish to save to keep down the mortgage.

But the headline mortgage rate is still 8.5 per cent, although this will depend on your financial circumstances.

But now that cracks are appearing in the wall of mortgage rates, it can only be a matter of time before the cost of borrowing for home loans falls in the UAE.

Middle-income segment set to drive mortgage market

Sixty to 70 per cent of mortgages in Dubai are taken by owner-occupiers and analysts have said this number is likely to increase as more people in the middle-income segment look to buy homes.

The mortgage market in Dubai has experienced dramatic growth in the past two years to reach Dh58 billion in 2007, according to the Land Department, with Dh20bn going towards home finance, as opposed to loans to buy commercial property.

The growth in the mortgage market has been accompanied by an increase in the number of owner-occupiers entering the secondary property market.

“Last year saw significant shifts from investors to end-users [owner-occupiers] with many projects completed,” said Homi Gandhi, head of Mortgages and Bancassurance at RAKBank.

Gandhi predicted the home finance sector would remain strong over the next few years as more people choose to move to the UAE to build their careers.

“Given the attractiveness of the UAE as a country to invest in, its stability and the strong economic fundamental drivers, we would expect to see the mortgage business remaining an attractive source of revenue for financial institutions in the future,” he added.

Despite the lack of solid information and figures on the segments of home finance customers, Aref Alharmi, CEO of Amlak, the Islamic home financing firm, said the largest growth will be in the middle-income base of home buyers who will require financing solutions over the next three to five years.

Alharmi said: “With no correction expected in the short run, even a slow down is not bound to affect the middle-range segment’s demand of property .”

Analysts agreed the emirate’s high rents is one of the factors pushing more middle-class residents to become home buyers. The recent five per cent cap on rent announced by the government is proof that rents are only on their way up, said some in the real estate field. As lower-income segments in Dubai look to get into the property market as a result, financing will grow, analysts said.

According to Aemon Al Ashkar, head of Research and Development Advisory at Colliers International, the only buyers who still pay in cash for their property are holiday home purchasers.

“There is no centralised research that shows the segments and profiles of mortgage owners. However, we have conducted an occupancy rate survey in the second quarter of 2007, which revealed that almost 50 per cent of occupied apartments in communities such as the Greens and Dubai Marina are inhabited by owner-occupiers,” Al Ashkar said.

The Colliers Dubai Real Estate Overview noted low and middle-income segments have traditionally been overlooked by financiers but added that things are turning around.

The past two years have seen many new trends in marketing mortgage solutions, both from the developers and lenders.

Easier terms on mortgages, attractive payment schemes, lower interest rates, a higher financing cap reaching 95 per cent and raffle draws and free gifts are an indicator that competition has reached new heights in Dubai’s home finance market.

Dubai mortgages valued at Dh57.5bn

The value of mortgages registered in Dubai so far this year is far more than reported, the Emirate’s Land Department said yesterday. Mortgages issued were worth a total of Dh57.5 billion while the value of plots and buildings sold amounted to Dh49.5bn.

The difference between the figures occurred because of the increased demand for liquidity – many borrowers took out loans secured against assets they already owned. The figures from the Land Department indicate that recent reports may have underestimated the size of the UAE’s mortgage market.

Yesterday Emirates Business quoted a report by investment bank EFG Hermes, which put the total value of mortgages issued this year in the country at Dh16bn.

However, Deputy Director Mohammed Thani said: “People are in need of cash so many mortgage their land and properties to get liquidity. They do this, not to raise funds to build on the land in question, but to obtain money for more than one project.”

Thani said the Dh57.5bn total did not represent the full value of mortgages arranged in the emirate as not all loans were registered with the department. The figures were welcomed by real estate company executive Akhilesh Bali, who said they meant people felt confident about the economic outlook of the UAE.

“The economy here is stable thanks to the governance and the support of the financial institutes,” he added.

Remortgages accounted for Dh16.2bn of the loans total. Bali added: “Factors remain the same. People who invested once will invest again.

“If they feel the market is good then there is high possibility of them applying for and getting a remortgage.”

Emirates Business yesterday revealed that the Land Department is drafting a new law to cover mortgages – a move that is likely to boost the real estate sector in the country. The legislation will replace a federal statute drawn up in 1985 that is seen as inadequate and outdated.

The new law will cover areas such as secondary mortgages – where a property and the loan on in it are sold on as a package – mortgage insurance and the registration of agreements.

Penalties for breaking the terms of a loan will be set out, as will arrangements for selling repossessed properties.

Mortgage market to hit Dh161bn in five years: EFG

The mortgage penetration rate in the UAE remains at about two per cent of gross domestic product, or GDP, representing an overall market size of Dh16 billion, analysts said. This has the potential of rising more than 900 per cent to Dh161bn over the next five years, Cairo-based EFG-Hermes said in its UAE Research Yearbook 2008.

“Mortgages will be driven by property transactions, which in the short term will be driven by property supply and further out by population dynamics. Over the next five years, we estimate a population increase of 1.4 million people, implying property transactions of Dh683bn. Assuming 21 per cent of this is financed (30 per cent of properties mortgaged with an average loan-to-value ratio of 70 per cent), this indicates a market size of Dh161bn, up from an estimated existing market size of only Dh16bn,” the EFG report released last week said.

The UAE’s two pure-play mortgage lenders, Amlak Finance and Tamweel, estimate their own market shares at more than 30 per cent each. “We believe the banks may be more aggressive in this segment going forward than they have been in the past.

Consequently, we believe this will reduce the market share of Tamweel and Amlak going forward, but ultimately this would also put pressure on spreads,” the report said.

The biggest challenge in 2008 for Amlak and Tamweel will be to obtain liquidity that does not upset asset-liability management, implying the lenders need term deposits with as great a tenure as possible, EFG said.

The key challenge will be for Tamweel to continue its securitisation programme and for Amlak to embark on its first securitisation as soon as the credit markets settle down. Both Amlak and Tamweel see securitisation as a major source of funding in the future, but with asset-backed securities falling into disfavour in the short term, this is going to make issues of this kind more difficult and/or expensive, EFG said.

Corporate sukuk issuance is also likely to return, and “we believe they are both likely to tap the sukuk market for liquidity next year. Overall, we estimate both companies will be able to raise about Dh2bn from credit markets and a further Dh2bn from investment deposits each.”

Amlak Chairman Nasser Al Shaikh told Emirates Business last week that it plans to raise as much as Dh6bn in 2008. The funds will also be used to finance regional growth plans that include entering three more countries in the first half of next year.

Amlak and Tamweel started this year expecting a banking licence. This would have given the lenders access to retail deposits that are cheaper than other forms of fund-raising. With the banking licence issue in limbo, the housing finance companies have set themselves the primary task of reformulating their funding strategies.

“In previous years, the housing finance sector has been funded principally by equity, although loans from principal shareholders have also been a significant driving force,” EFG’s analysts wrote in the report.

Amlak has offered a corporate sukuk while Tamweel has completed a securitisation issue. “This, however, is not really scalable. With capital adequacy ratios around 37 per cent, it was clear that a decent return on equity was going to be difficult.

“Furthermore, this funding from senior shareholders had been manageable while the companies were small, but more difficult as the companies grew. This is where the retail deposits were supposed to come in: retail deposits provide a scalable cheap source of funding,” the report said.

In the short term, the fallback plan was corporate investment deposits. “These are loans from public pension schemes, quasi-state bodies and large corporate enterprises, from whom the potential funding pool is large. Also by being flexible on tenure, and paying up, the housing finance companies have suggested they are able to attract a near unlimited pool of liquidity.

“The trick though is to obtain liquidity that does not upset asset liability management, and for that, the housing finance companies need term deposits with as great a tenure as possible. The result, at least for Tamweel, is it is critically dependent on a small pool of investors, who are happy to make six-month or one-year deposits for relatively small premiums to interbank rates. Clearly, pension funds, with their own long-term liabilities, are the ideal candidates.”

The second scalable option is that of securitisation. Tamweel was the first to respond. Its second round of securitisation this year was for cash-collateralised, residential mortgage-backed securities within a formalised issuance programme. The timing was good, coming as it did immediately before credit markets began to experience problems. Tamweel was able to place the issue at 30 basis points over the London interbank offered rate, or Libor. About 85 per cent of the Dh710 million issue was rated “AA”, EFG said, with even the blended yield for the top three tranches that it sold on (AA, BBB+ and BB-) amounting to no worse than 51 basis points.

One further source of funding has been from escrow accounts, which have been developed as intermediary accounts between purchasers of property and property developers. While both companies now have obtained permission to open escrow accounts, raising actual balances on these will need to wait until 2008.

“While the sums being paid into escrow accounts are large, we believe the balances on this business will be reduced by competitive erosion as both buyer and seller fail to benefit from these balances. We estimated Amlak and Tamweel are well positioned to accumulate balances, but even assuming a substantial market share, we estimate at the peak this will only amount to about Dh1.5bn each,” EFG wrote.
There is also the possibility there will be some resolution on the banking licence issue. Alternatively, EFG’s analysts believe there is a possibility one or the other housing finance company will look to acquire a licence either through acquisition of a bank or a stand-alone banking licence. Tamweel has pointed out the possibility there will be a regulatory change, which obviates the need for a banking licence and allows mortgage lenders to raise public deposits.

“We do not forecast any of these happening, but nonetheless, these would, in principle, surely provide upside for our fair value estimates,” said EFG.

DIB, National Properties sign mortgage deal

UAE's National Properties, a unit of National Bonds Corp, said on Monday it had signed a deal with Dubai Islamic Bank to offer Islamic mortgage services.

Mortgages would be offered for unit purchases in all its projects including Skycourts, a 1.5 billion dirham residential project in Dubailand, the firm said in a statement.

Dubailand is a stretch of desert almost five times the size of Manhattan, where another developer is building what its says will be the world's longest leisure strip with hotels modelled on Egyptian palaces, Hollywood and London's Houses of Parliament. (Reuters)

Mortgage law shake-up on the way

The rapidly developing mortgage sector in Dubai will be streamlined by a new law currently being drawn up. The legislation will take the place of a federal statute dating from 1985, which is regarded as outdated and unable to meet the demands of today’s market.

The move was welcomed by lawyer Sharatchandra Bose, an expert on mortgages, who said the introduction of effective rules would assist the future growth of the home loans market.

The new law will cover areas such as secondary mortgages – where a property and the loan on it are sold as a package – mortgage insurance and the registration of agreements.

Penalties for breaking the terms of a loan will be set out, as will arrangements for selling repossessed properties through an auction, a court order or Dubai’s Land Department.

The law should make it easier for expatriates to take mortgages. And it is intended to help UAE nationals, who at present have difficulty obtaining loans to build homes on land granted to them by the government.

A first draft is currently being prepared by a committee at the Land Department and will be ready in the first quarter of next year. At present mortgages are covered under the Amended Federal Law Number Five.

“There was an urgent need to come up with a new law to cope with developments in the real estate sector,” said Land Department Director-General Mohammed Sultan Thani. “The current law is more than 20 years old.

“Currently banks and finance companies face many problems in terms of recovery of mortgage debt. The procedures are too long and complicated. The new law will simplify these procedures and make it easier for both banks and finance houses and their customers.”

He said the legislation would allow lenders to be more flexible when giving mortgages to expatriates.

“Earlier, expatriates were not allowed to own properties in the emirate. However, recently they were given the right to purchase in some areas. Many buy with loans, but banks are hesitant to approve such applications as there are not enough safeguards for them. The committee drawing up the law is looking into this issue.

“Plus it is difficult for nationals to get a loan to build a house on land granted by the government. The new law will solve this problem.”

Bose, a contract and commercial specialist at Dar Al Adallah Lawyers and Legal Consultants, said: “Dubai’s mortgage sector has great potential for growth if an adequate and clear-cut mortgage law can protect the interests of lenders and borrowers in the freehold and leasehold markets.

“If banks and financial institutions are confident that such a law would guarantee the recovery of their money, they will sanction mortgages and strengthen the property sector. Some banks are reluctant to enter the market mainly due to the absence of a system governing ownership, specifically property repossession, enforced eviction and asset liquidation in the case of non-payment.”

Bose said the existing legislation was inadequate and did not address a number of important issues. “It is customary in Dubai that if a borrower has no place to live other than the mortgaged home and is unable to repay, he cannot be evicted since he has nowhere else to go. This is a protection given to the residents. In order to encourage lenders to enter the market their interests should also be considered.”

Bose made a presentation to Land Department officials in which he said there had been few mortgage defaults in the past three years. “The increase in prices enabled a borrower, who got into financial difficulty, to put their property on the market, make a healthy premium and repay the loan. But in bad times, when interest rates are high, some borrowers will not be able to pay back.”

He said some mortgage advertisers made misleading claims about low rates and payments and withheld information about the true cost of loans.

Best Interest Rates

With interest rates in the U.A.E. going up and down and different lenders having different interest rates and fees, One Stop Mortgage Broker will obtain the best rate in the mortgage market and put all the options and promotion rate in your hands to choose from.