Home loan in UAE: Borrowers play it safe

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The gradual increase in US interest rates is having a telling effect on UAE mortgage takers. Facing an increase in their monthly installments, they are likely to swap their existing mortgage to go for longer fixed rates. Also, with several projects launched in 2014-15 nearing completion this year, banks will see a good take-up of mortgages in Dubai, especially from end-users who purchased mid-priced properties.

"Long-term fixed interest rates of 2 to 5 years have been popular in the UAE in the past few years but are being phased out by banks due to increasing interest rates in the US. Five-year fixed rates are now impossible to get, with most lenders only offering 1 to 2-year fixed rate options and some only offering variable rate options," says Lukman Hajje, chief commercial officer of Propertyfinder Group.

However, instances of refinancing have not been so widespread. "Rate rises thus far have been well-advertised in advance and for the most part, mortgage owners have been cognizant of this. Accordingly, any refinancing [past, present as well as in the near future] has been and is likely to remain gradual rather than a spurt," reckons Hussain Alladin, head of IR and research, Global Capital Partners.

"The US Fed has increased rates by another quarter per cent for the sixth time since December 2015. Existing or new mortgage buyers are keen to opt for longer fixed rate options than variable. However, banks have kept the borrowing rates under control by reducing their base lending rate, thereby giving options to the borrower to rethink their strategy," observes Dhiren Gupta, managing director, 4C Mortgage Consultancy.

Due to the competitive nature of the off-plan market, many such projects sold in 2016 and 2017 required lower upfront cash deposits from buyers, with 20 per cent to 30 per cent being most common.

"Some speculators who bought between 2014 and 2017 will switch to buy-to-let investors and will likely prefer to obtain a low interest mortgage now rather than pay cash," Hajje adds.

There has been an increase in the number of end-users buying property financed through home loans in Dubai.

"The incidence of mortgages as a percentage of overall transactions was 20 per cent in 2012, and has now grown to over 55 per cent in the first 2 months of 2018. In absolute terms, the number of mortgage transactions in 2018 was identical to the number in 2017 even as the overall number of transactions in the market dropped y-o-y by 20 per cent. This indicates that mortgage demand has been remarkably stable, implying that a fair percentage of these must be end-users," adds Alladin.

According to Mortgagefinder.ae, approximately 70 per cent of buyers in the secondary market are now mortgaged. Only 30 per cent are cash buyers.

This suggests that Dubai's mortgage market is maturing and converging with international norms in America and Europe (where nearly 3/4ths of the market is dominated by mortgages).

Historically, people have taken out mortgages has been in the upper end of the market and therefore inclined towards the villa segment. "In 2017, however, there was a marked increase in mortgage activity [65 per cent rise] in the Dh1 million to Dh2 million price bracket, suggesting that banks are more inclined to lend to the mid segment of the market," cites Alladin.

"Generally, buyers are more comfortable with the affordable segment. End-users in the Dh1 million to Dh3 million price range continue to dominate. Loans for properties priced above Dh5 million continue to be hampered by the mortgage cap regulation which stipulates a loan of 65 per cent for expats and 70 per cent for locals. Bank margins are being squeezed and they are being more cautious particularly above Dh10 million," informs Propertyfinder Group's Hajje.

Mortgage sales have superseded cash sale transactions in Dubai for the past few years.

"For the past 3 years, mortgages have accounted for more than 60 per cent of property sales transactions. In 2018, till date, more than Dh24 billion worth of mortgage transactions are documented as compare to around Dh8 billion cash sale deals. Similarly in 2017, around Dh114 billion worth of mortgages were registered under the Dubai Land Department as compared to Dh55 billion worth of cash sale transactions," informs Gupta.