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Mortgage Basics When Building a Home

A Rundown of the most important things to know about home financing in the UAE

With property prices easing and an abundance of new properties available, more people are choosing to purchase property either as an investment or to reside in. It is true that it is often cheaper to purchase property than to rent, making basic knowledge about mortgages in the UAE advantageous to potential buyers. Mortgages are only granted through banks registered with the UAE Central Bank and are subject to government regulations.

At the end of October 2013, the Central Bank issued a new set of regulations on mortgage lending in the UAE. The Central Bank’s aim was to ensure that banks providing mortgage loans do so in accordance with best practices and within a controlled environment. By defining the eligibility of various categories of borrowers based on a loan-to-property value (LTV) ratio and prohibiting the use of personal loans and credit cards to meet downpayment requirements, the regulations prevent uncontrolled lending to property buyers and place an onus on buyers to ensure their mortgaging budgets are realistic and sustainable.

Criteria UAE nationals and non-UAE nationals each have their own eligibility criteria. For UAE nationals, the first-time borrowing limit for properties valued at Dh5 million or less is set at 80 per cent of the property value, and for expatriates the limit is 75 per cent of the property value. For properties worth more than Dh5 million, the loan cap is set at 70 per cent of the purchase value for UAE nationals and 65 per cent for expatriates.

For second and all subsequent property purchases, UAE nationals are allowed to take up a mortgage for up to 65 per cent and expatriates up to 60 per cent of the property’s value. Mortgages are available for off-plan property purchases, which have a maximum LTV of 50 per cent, regardless of the property’s value or the lender’s nationality.

The regulations also limit the mortgage repayment period to a maximum of 25 years, with the minimum age at the time of last repayment set at 70 years for UAE nationals and 65 years for expatriates. However, if the expatriate is self-employed, the maximum age is extended to 70. The regulations also stipulate that monthly repayments may not exceed 50 per cent of a mortgagor’s monthly income, and the total loan amount should not surpass eight years of a UAE national’s annual income or seven years of an expatriate’s annual income.

Sharia-compliant mortgages are also available in the UAE, commonly through a process called “murabaha”, or cost-plus financing where the transaction is structured in a manner whereby the bank purchases the property and resells it to the property buyer at a higher price. The buyer then pays the bank the higher purchase price through instalments over an agreed period of time. This is equivalent to what would otherwise be the initial purchase price plus the interest. An alternative, “mushakara”, is also available whereby the bank and the buyer form a partnership to buy the property, and thereafter the bank gradually sells the property to the buyer over time as instalments are paid.

The process in brief

It is important to bear the lending criteria in mind before proceeding with a property purchase and obtaining an approval in principle (AIP) from your bank. The AIP will determine the amount of the mortgage, the deposit requirements and the overall financial eligibility for a mortgage. For a bank to consider granting an AIP, it will request a number of documents, including:

- Passport and visa page copies - Salary certificate addressed to the bank - Latest six-month bank statements from the personal account - Details of all liabilities both in and out of the UAE

Obtaining an AIP generally takes three to five working days. Ensuring that a buyer can meet the financial mortgage requirements and can select a property within means is crucial to obtaining an AIP and, in turn, proceeding with the purchase and the mortgage. Applications for the AIP might be rejected based on the lack of data or an unsatisfactory credit check received by the bankor the UAE Central Bank.

Once the AIP has been issued and the property is purchased, the bank can begin the re-approval process. The sale and purchase agreement (SPA) will determine the financial obligations of the purchase and the bank will at this point usually request a copy of the title deed, a copy of the current owner’s passport, the signed SPA along with the proof of receipt of any deposit cheques given to the seller, and details of any existing outstanding finance on the property, usually by way of a certificate of liability from the current mortgagor or a statement of clearance issued by the seller’s bank after the current mortgage liability is settled.

The final mortgage approval letter should be issued after the bank receives a property valuation report. The existing mortgagee bank would then release all original documentation held in trust, allowing for the property to be transferred to the buyer. There are a number of further formalities that will require the buyer’s attention, particularly pertaining to the purchase and the registration process, such as the requirements for no-objection certificates from the developer or master developer and the opening of a suitable account with the bank from where the monthly instalments will be paid.

On the registration date (as determined by the SPA), both the buyer and seller and a representative of the bank must visit the Dubai Land Department (DLD) or a registration trustee authorised by the DLD to complete the transfer process and the mortgage registration. Once the DLD has verified all the documents and the fees are paid to the registration trustees and the DLD, including the mortgage registration fee equivalent to 0.25 per cent of the mortgage, the buyer and seller will sign the official transfer documents. The title deed will be issued in the buyer’s name, with the bank holding the original title deed and the buyer receiving a certified copy.

A similar process is followed for the registration of mortgages over off-plan property. However, this can only occur once these properties are registered on the interim property registry of the DLD or Oqood system. Although the Central Bank is a federal institution, every emirate has enacted its own laws governing real estate and the registration of security interests of real property. It is therefore important for individuals seeking a mortgage to be aware of the particular requirements of the emirate in which the property is located to avoid unsuccessful mortgage applications.

John Peacock Senior Associate – BSA Ahmad Bin Hezeem & Associates LLP
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