When purchasing property using bank finance in the UAE, a buyer will have to shell out at least 25 per cent of the price upfront, as per Central Bank regulations. Many property stakeholders believe this limitation is holding back a sizeable portion of potential homebuyers, and suggest that authorities should instead increase the loan-to-value (LTV) ratio to encourage first-time buyers. Here is what you need to know:
In 2013 the Central Bank introduced a maximum 75 per cent LTV rate to cool a potentially overheating market, and it achieved the desired effect. Six years on, there are calls for a reversal or at the very least a softening of this stance. If the LTV will be relaxed to say 85 per cent, this would be a very positive step for the secondary property market as there is a high demand, but would-be buyers are struggling to raise the required 25 per cent deposit.
There doesn’t need to be a widespread higher LTV ratio, but there is a definite need for a first-time buyer product. The buyer sentiment is there. For example, over the last few weeks in Jumeirah Golf Estates, the developer spread the down payment of 25 per cent over 18 months on a ready stock. This is a microcosm of the market, showing that there is a desire in people to want to buy property in the city but, in some cases, the affordability is holding them back. Once we see movement in first-time buyers, we will see a domino effect through the market with a lot more activity, positivity and confidence.
A higher LTV generally increases the number of people who can enter the real estate market. However, we must not forget the reasons why LTVs were reduced a few years ago to the levels they currently are. If the authorities were to increase the LTV, it is essential that banks are more careful in their application review process to make sure that the mortgage applicant, particularly first-time homebuyers, can cover the mortgage payments.
If banks were to reduce the 25 per cent deposit to say 10-15 per cent, there would be a huge number of people who would bite the bullet — stop renting — and start looking to buy. If the banks were to lend this little bit extra, we would see a sharp increase in the number of people looking to purchase, which would inevitably mean fewer people looking to rent — this, in turn, may well reduce already-inflated rental prices.
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