After finding your dream apartment or a property suitable for investment, how do you want to finance the property? A Majority of people do not have enough money to buy the property in cash, so the only suitable option is to apply for a mortgage.
Investing in an off-plan property In the United Arab Emirates (UAE) is financially manageable, as you only have to pay 10%-20% of the original price as an initial deposit; and pay the rest of the payment as per the terms on the contract. You also have to pay a premium, a transfer fee, and the fee of the agent (in case you have hired one – but that is only a small percentage of the original price).
A mortgage for off-plan properties is usually favourable compared to other types of property loans. It allows investors to purchase the property at the lowest possible price, without affecting the potential of achieving the highest returns.
Let’s take a look at the procedures of getting mortgage for an off-plan property in the UAE:
Latest Regulations by the UAE Central Bank
The Central Bank of the UAE introduced a new set of Regulations at the end of October 2013 on mortgage lending for banks and other financial institutions, which came into effect at the end of December 2013.
The Regulations mainly define how to use the ”loan to property value” ratio (LTV) in order to determine the eligibility of the borrowers. The job of the Central Bank is to regulate how banks and other financial institutions provide mortgage loans to UAE nationals and expatriates according to standard procedures. The same Regulations are applicable to the institutions providing Shariah-compliant loans.
The goal of these newly introduced Regulations is to establish real equity in property investments and prevent a real estate bubble similar to that of the US subprime mortgage crisis.
Off-Plan Mortgages from Banks or Financial Institutions
In case of purchasing off-plan properties, the rules of getting mortgage loans from banks are similar for both UAE nationals and expatriates.
In case of an off-plan purchase, the maximum LTV ratio for mortgages is 50% for both UAE nationals and expatriates irrespective of purpose, value or category of the purchaser. This translates to the loan amount not exceeding 50 % of the value of the property. Borrowers actually do not have many options to obtain credit as only a small number of financial lenders operate in the market. In addition, banks generally only approve mortgage loans for properties that belong to the Master developer category, which amounts to only a handful of renowned developers. Nevertheless, they also occasionally approve loans for projects belonging to private developers.
In any case, in order to finally obtain a mortgage loan, you must pay at least 50% as a down payment on the property. After that, banks will pay the outstanding 50% to the developer’s escrow account according to the payment schedule.
The bank will charge interest on the disbursed amount after the payment has been paid to the developer. You must note that the interest rate remains high during the construction period but tend to settle at a lower rate after the completion of the project.
Moreover, as a borrower, you must know that the bank will not release its payment to the developer’s escrow account unless it gets the Oqood or pre-registration document, which the Land Department will issue after being paid the 4% registration fee.
Only a few banks are offering the facility of providing loans for off-plan property purchases, so find out which bank offer such services before applying for a mortgage loan. There also exist Shariah-compliant off-plan loans known as Forward Ijara for those who are interested to use Islamic banking in the purchase of their property.
The Evaluation Process
According to the Regulations, it is the responsibility of the mortgage providers to provide a list of board-approved independent evaluators. This independent evaluator will not in any way be connected to any party – borrower, seller, developer, or the loan approval committee – and will conduct the evaluation of the property.
The Regulations also set the maximum repayment period and the age limit of the borrowers. The maximum period of repaying a mortgage loan is 25 years. On the other hand, a borrower should not exceed 70 years of age for UAE nationals and 65 years of age for expatriates from the date of the last instalment of the loan. The age limit for expatriates can be extended to 70 years of age if that person is self-employed.
The Regulations for getting a mortgage for an off-plan property in the UAE are straightforward and clear. And have proved to be quite successful in upholding the rights of all parties involved – borrower, lender, and the developer.