DUBAI/ABU DHABI- The United Arab Emirates' banking group is considering whether to ask the central bank to relax mortgage lending rules to stimulate a fragile real estate market, sources familiar with the matter said.

At the moment, first-time buyers of a home worth up to 5 million dirhams can only borrow up to 80 percent of the property value if they are UAE citizens, while the cap is 75 percent for foreigners.

The UAE Banks Federation's retail banking committee has proposed that the limit be raised to 85 percent for UAE nationals and 80 percent for foreigners, the sources said. They added that the CEO Advisory Council, made up of bank chief executives, is considering the proposal and, if approved, will suggest it to the central bank.

The UAE property market has been suffering from a flood of new supply, with S&P estimating earlier this year that prices in Dubai, the country's largest real estate market, could slip 10 to 15 percent over the next two years. Dubai property market transactions fell 16 percent year-on-year in value in the first half of the year, according to data from Dubai Land Department.

Still, some banks are reporting an uptick in demand for mortgages as customers seek to take advantage of the price drop.

"The mortgage business has been picking up. Prices have come down and prices are stabilising," said Subroto Som, executive vice president and group head of retail banking at Mashreq MASB.DU . "The mortgage demand is primarily driven by people who either decide to switch from rentals to ownership or upgrade to bigger properties, and investors who want to take advantage of high rental yields."

Recent government pledges to offer long-term visas to selected investors and professionals and allowing foreigners to own 100 percent of businesses outside free zones will further stimulate mortgage demand, he said, along with more favourable payment terms offered by real estate developers.

Mashreq's outlook for new loan growth in 2018 will be less than 5 percent, with new loan growth driven by mortgages, he said.

Abu Dhabi Islamic Bank said it was also seeing a pick-up in its mortgage business.

"We are growing in real estate, we are targeting the end-user and people who want to live in this country," said acting-chief executive Khamis Buharoon al-Shamsi. "We are targeting them, they are not speculators."

The UAE's current mortgage lending rules were introduced in 2013, at a time when property prices were on the rise, in an effort to prevent another boom-and-bust cycle in the property market.

UAE property prices plunged more than 50 percent between 2008 and 2010 after a speculative bubble burst, pushing Dubai close to default.

(Reporting by Tom Arnold and Stanley Carvalho; Editing by Hugh Lawson) ((Tom.Arnold@thomsonreuters.com; +97144536265; Reuters Messaging: tom.arnold.thomsonreuters.com@reuters.net))