'Mortgage sector has become too complex' |
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Many factors slow down the processing of mortgage applications in Dubai, says Chris Dommett, CEO of John Charcol Dubai. They include the complexity of the UAE mortgage market, the absence of a credit bureau and the lack of trained and qualified staff.
"The difference between the UAE market and the more developed markets of the United Kingdom or the United States lies in the issue of complexity," Dommett told Emirates Business.
"Here you've got buy-to-let products, you've got interest-only products and you've also got the difference between the Islamic and conventional products, so there are a lot more products to choose from."
Another problem is the absence of a credit bureau. Although Emcredit, UAE's first credit bureau, opened its doors in 2006 the processes are still not yet fully developed, Dommett said.
"In the absence of a credit bureau, which is one of the main tools that is used in the UK to access credit, banks here have had to find surrogates in form of income statement and put together the credit story for each applicant." In addition banks are struggling to find skilled and experienced people.
"The banks are just not able to hire good trained staff, that is why they constantly poach from one another."
Interest rates in the UAE are more expensive than those in developed and developing countries.
Interest, however, is almost negligible if the appreciation of a property in Dubai and the nature of risk are to be considered, said Dommett.
"In the overall picture, mortgage rates are actually cheap," he said. "When somebody buys a property he or she is not looking at a one or two or three per cent profit gain, the buyer is looking at 75 per cent to 90 per cent appreciation within a year. So when buyers look at that potential capital gain the less sensitive they become to the interest rates."
The John Charcol company is the UK's leading independent mortgage advisor.
How is the UAE mortgage market different from those in other countries?
The UAE market is a developing market compared to the more developed markets of the UK or the US and elsewhere, and over the past few years, it has also becoming more complex. In addition, land laws and property developments have become more open to foreign investments and foreign purchase. A few years ago there were no commercial mortgages in the UAE at all, not even for UAE nationals. But over the past 18 months mortgage offerings have sprung up and now more than 20 banks in the country are offering mortgage products.
Why is obtaining a mortgage a complex process in the UAE? Is it complicated in the sense that mortgage firms and banks take longer to approve applications?
It is complex because you have a wide variety of products. You've got the difference between Islamic and conventional products, for one. But the whole process of taking a mortgage is also quite a bit more complicated here than it would be in more developed and more regulated markets.
Yes, it [approval] can take longer partly because the banks are struggling with the volumes of applications, while at the same time their processes are just being developed to handle the approval of a mortgage. You don't have a credit bureau here so they have to find surrogates for that in the form of income statements, bank statements, meaning they have to put together an account story for every applicant. Banks' systems also have challenges to overcome.
The top mortgage firms in the country promise quick approval - basically between one hour to 48 hours. Some customers, however, say this is not really what's happening. What is the realistic time frame of approval?
Banks and finance companies are indeed offering quick turn-around. For very simple straightforward straight cases, they can do that because they use a very simple credit solution. Knowing the realistic target is a very difficult question.
I have horror stories of mortgages taking six months - they were complicated because the applicants were self-employed or they involved company mortgages. There is no standard time frame across the banks. That is why a broker really adds value by finding a lender that consistently delivers on the promised turnaround time.
The key issue is not the pricing, it is: 'Can the lender deliver the mortgage within the time frame they need?' Most buyers are actually tied down by a time frame.
Are mortgage processes here slow?
It is still very slow and a number of factors are behind it. Like I said the banks' processes themselves are not that efficient. The lack of a credit bureau makes it difficult to asses the credit worthiness of an applicant.
The banks and firms are struggling with a lack of resources. The banks have not been able to keep up with the demand. There's a small pool of experience in mortgage processors, and banks are constantly poaching from each other.
Do we really need a credit bureau in this part of the world? Some analysts say the speed of approval is not related to credit bureau availability as each lender or financier would still need to do its own credit check and credit assessment.
The UAE is currently in the process of bringing together a credit bureau called Emcredit. However, the issue with the credit bureau is being talked about for 10 years.
I remember that central banks were trying to have a central database but it really didn't take off. It really needs strong legislation, regulation to force banks and credit companies to provide good and quality data into a central bureau and then they'll be able to build up a database over a number of years.
But why are the interests higher here, despite the fact that we're dollar pegged? Are the rates today justified in any way?
Because banks and firms can charge that and there's also a higher risk factor. Here it's all very new and it's been conceived as risky particularly when you consider banks are relying on the property for security, while there are still no real clear laws on repossessing that property.
There is also a substantial number of people who are not UAE nationals so obviously, when things turn bad, they can quite easily leave the country. I think the rates here are justified because the market decides the rate. In the overall picture, because of high property gains and the high rental value, it's actually cheap.
Do you think 100 per cent lending could be happening?
Not for quite some time. One of the problems that has contributed to sub-prime crisis in the US is the 100 per cent lending there. Because the borrower has no stake in the property, they borrow more than they can afford and when prices start coming down, it becomes a negative equity. Firms and banks in the UAE used to issue loans of 95 per cent of the valuation in some cases but now they will probably start coming down. Some are lending only 75 per cent. So the trend is moving away from high loan values and is going towards the buyers who can afford to put more contribution.
We hear from advertisements that getting a mortgage here takes only hours. Why would property buyers then need a mortgage broker?
We add value. We do all the phone calls and talk to 20 different banks so we can tell you which are the better deals.
Also, there are processes that can be quite cumbersome as banks have different requirements in terms of documentation and implementation forms and that's where the broker comes in.
Firstly, it can provide you with the most appropriate deal to your particular profile. Secondly, it will go through the process with that bank, so where the broker comes in, it helps you choose the best bank, the best deal, and the easiest process that you can get. So you can end up with the keys to a property without having a heart attack or being totally stressed out.
Profile: Chris Dommett, CEO
Dommett joined John Charcol Dubai from the UAE's Emirates NBD bank, where he served most recently as Head of Retail Credit. Previously, Dommett worked with Standard Chartered in offices around the world, notably developing and launching mortgage products in Brunei, Qatar and the UAE.
Established in 1974, the John Charcol company is the UK's leading independent mortgage advisor. John Charcol Dubai, an independent franchise operation, was launched in 2007 and currently works closely with the country's leading financial institutions, property developers and estate agents with the intention of bringing speed and transparency to the UAE's property buying process.
By Karen Remo-Listama
© Emirates Business 24/7 2008
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This is great piece to get acquainted with mortgage segment of UAE market. UAE seems like a buyers market for mortgage borrowers and this brokerage can truly add a lot of value for the borrowers.
It is quite amazing why the lawmakers in GCC are ignoring the legislation for encouraging credit bureaus and local credit rating agencies. These two are vital components of financial markets, because both provide second credit opinion to decision makers.
Many people like me are wondering how personal financial products and bond/sakuk markets will develop, when there are no credit bureaus and rating agencies. Credit bureaus typically risk-rate small companies and businesses as well as individuals; while credit rating agencies provide a risk due diligence on medium to large size corporates. [Report Abuse | Email to a Friend | Reply to this Comment]