Mortgage cap plans put on hold in Dubai while discussions get underway

Talks are to take place over the next few months about proposals to limit mortgages for foreign buyers in the United Arab Emirates, it has been confirmed. New lending rules issued by the UAE Central Bank were due to have come into force last month but they have been put on hold as a result of concerns that they might put off buyers and hinder Dubai’s real estate recovery.

The Bank wants to limit mortgage loans for foreigners to a maximum of 50% of the property’s value and to cap loans at 70% for UAE citizens. It also plans to limit loans for second properties to 40% for foreign buyers and 60% for UAE citizens. However, there was so much criticism of the plan that the Bank’s Governor has confirmed that the proposed caps are on hold as a consultation with lenders in the real estate industry is now underway.

The Emirati Banks Association (EBA) is pushing for the caps to be relaxed, suggesting expats should be able to borrow up to 75% and domestic buyers 80%. The EBA is also considering proposing a limit on the total value of an individual mortgage to AED25 million, although this would affect only 2% of the UAE mortgage market. Other rules and regulations are also up for discussion including the length of mortgages and there are suggestions these may be limited to 25 years.

The Bank said that the consultation process is likely to last for three to six months and its aim is to put curbs in place to reduce the real estate market over heating as it did in 2008. Since then some markets have lost up to 60% of their value and there have been the first repossessions and court cases over loan defaults.

Quote from PropertyCommunity.com : “My tenant is asking to renew the contract much in advance. Is is because rents are increasing ? and he is afraid that I might ask for increased rate as per prevailing market when it comes to renew the contract. Can landlord increase the rent in second year ? I know the RERA calculator but would like have comment from forum members.”

With cash buyers responsible for around 70% of purchases in the Emirate some analysts question both how effective the move will be in controlling the resurgent market and whether in fact the Bank is targeting the wrong type of purchaser. According to Helen Tatham, Knight Frank’s director of residential in Dubai, foreigner buyers will always be interested in the emirate because it is a strategic location between east and west and a hub for international business. She expects the real estate market to continue to strengthen this year.

Richard Paul, residential valuations at Cluttons in Dubai, said that a strong rebound in property prices last year has led to concerns that it could all go badly wrong again as it did in 2008. ‘By reducing LTV levels for expats and nationals, the Central Bank is looking to regain some control from the hands of the local and international lenders, who to date, have battled it out for market share offering more attractive terms, thus potentially boosting property prices beyond sustainable levels,’ he explained.

However, he says that the emirate needs to take care not to deter first time buyers. ‘First time buyers looking to invest and settle in the UAE are the type of investment that any property market needs. Increasing LTV ratios to unrealistic and unreachable levels will ultimately convince first time buyers to buy elsewhere, perhaps in their domestic markets,’ said Paul.

‘Despite the expected retraction from initial legislation, those steps taken by the Central Bank are sensible. The Central Bank’s aggressive directives will go some way to discourage sentiment driven investors, who helped grow the bubble of 2008. Discouraging investors who look to make fast profits by flipping property is a good move, but we cannot lose the backbone of our property market which is the first time buyers,’ he added.