The recommendations are contained in the EBA’s response to a notice issued by the Central Bank on December 30 to cap mortgage loan-to-value (LTV) ratios in a bid to prevent overheating the property market and to reduce loan defaults.
The Central Bank has suggested capping LTVs at 50 percent for expats and 60 percent for nationals.
In a statement on Wednesday, the EBA confirmed it had sent its recommendations to the Central Bank.
It says accepted sources of repayments should be salary and/or other regular income, such as rental and business income, but not end-of-service benefits.
The maximum repayment period should be set at 25 years, as long as the borrower would still be less than 70 years old at the last installment for UAE nationals, or 65 years of age expats.
Only a first class mortgage or second degree mortgage in the case of properties also financed under the various Government Housing Schemes would be accepted as collateral against the loan.
The EBA also requested the Central Bank to include regulations such as transparency in the setting and publishing of all fees and interest rates, including the calculation of the interest/profit rate, with clear prepayment guidelines clarified at initiation.
“Finally, it’s essential to emphasise on the continues cooperation between Emirates Banks Association and the Central Bank to protect the borrowers, the banking sector and the national economy,” the statement said.
“This cooperation has proved the role of the Emirates Banks Association and all its efforts in representing the banks through a unified point of view, and its keenness on the future of the banking sector in the UAE.”
In January, EBA chairman Abdul Aziz Al Ghurair said LTV ratios for properties yet to be completed should be capped at 50 percent cap in a move designed to minimise ‘flipping’ – the rapid on sale of off-plan properties.
But this recommendation was not included in the final letter to the Central Bank.
The EBA also considered limiting the total value of an individual mortgage to AED25m (US$6.8m). Al Ghurair said such a limit would impact only 2 percent of the total mortgage market.
Al Ghurair, who is also CEO of lender Mashreq and chairman of Dubai International Finance Centre, said there had been an over-reaction to the notice and no decision had been made. He insisted the Central Bank was consulting with the EBA and that it wanted a consensus among banks.
“We received [the December 30 notice], but when we sought clarification they said this is a dialogue,” Al Ghurair said.
Al Ghurair said the changes were in the interests of protecting borrowers rather than banks. “It’s important to know it’s a protection for the consumer, it’s not for the banks,” he said.
“Banks will survive a crisis and real estate developers will survive a crisis… but ultimately we need to ensure the consumer is really guided.
“It’s important… that we put some guidelines on this.
“Some people say ‘no problem, I’m going to get this income from the future, I’m going to get that bonus’ and they over spend on their dream house and they end up unable to pay.”
He did not believe the changes would impact the property market.
“People have speculated that it will be negative to real estate, [but] 70 percent of the real estate sales [are] on a cash basis so it’s going to impact 30 percent [of the market],” he said.
Al Ghurair said ahead of any decision by the Central Bank, lenders were acting individually, according to “what they think is right for them”.
He said any new policy should be revised “as the market changes”.
“We believe this is a dynamic and it should not be a static policy and it should be revised as and when the market changes,” he said.
“If real estate overheats and there’s a potential [for an] explosion in the real estate market maybe we can further regulate it to protect everybody and when we want to stimulate the real estate market we can relax it.
“We may only tweak it.”
Al Ghurair expected another round of negotiations with the Central Bank before it made a final decision, which would likely be introduced in the second half of the year.