Mortgage rates up, loan-to-value falls

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Mortgage rates in the UAE are likely to rise further due to the liquidity strain, while the loan-to-value (LTVs) ratio is expected to further decline, a report said.

HSBC's UAE Real Estate Sector Update said mortgage rates are likely to come under upward pressure given the current liquidity strain.

ADCB had recently revised its mortgage rates upwards by 50bp, while Tamweel plans to increase its rates to 8.4 per cent from 7.4 per cent. Currently, the interest rates in the UAE are already higher than the United States. The UAE's rates average at 7.5 to 8 per cent, regardless of the tenor of the mortgage loan. That is 2.4 per cent higher compared to the United States's 5.6 per cent rate for a 30-year mortgage and about 5.2 per cent for a 15-year loan.

"Liquidity in the system is now coming under strain. This is clearly demonstrated by the increasing spread between Eibor and Libor, with the domestic cost of borrowing on an upswing," the report said.

"While the UAE Central Bank recently announced a liquidity injection, the terms on which banks could tap this facility were rather tough, as the CBU weighs inflationary pressure against growth," it added.

Mohsin S Khan, the International Monetary Fund's Director for the Middle East and Central Asia Department, explained that the central bank's injected facilities were not utilised because they are also very expensive and availing such facility signals the weakness of a bank.

"And banks do not want to send that signal," he said.

In light of heightened risk perception surrounding the real estate sector, banks are also likely to lower mortgage LTVs, HSBC said.

The report, obtained by Emirates Business, said early evidence suggests that this has already begun.

HSBC Home Finance recently reduced its mortgage LTVs from 85 per cent to 60 per cent on apartments and 70 per cent on villas.

Tamweel and Amlak also reduced their LTVs from 90 per cent to 75 per cent and 65 per cent, respectively.

Additionally, anecdotal evidence suggests that the spread between mortgage providers' property valuations and actual property prices has widened significantly. "This means that LTPs (loan to price) are increasingly falling below LTVs, putting further pressure on demand," it said.

The recent stock market decline has not helped, as it highlighted the region's vulnerability to global trends - in equity, debt and property.

The fall-out from the decline in the stock market is wealth destruction and risk aversion, which add to liquidity constraints, hitting demand for property.

"All this, in combination with the weeding-out of speculatively driven demand and incessant corporate scandals, is bound, in our opinion, to lead to some weakness in property prices," the report added.

By Karen Remo-Listama

© Emirates Business 24/7 2008