Loan to value is the term used by banks when lending against an asset. In most scenarios, this will be a property. The percentage relates to how much the bank is willing to lend against the value of the asset.
How do loan-to-value ratios work in the UAE?
There are several important points to understand when it comes to loan to value (LTV) and what the bank will base the loan to value against.
Firstly, the bank will instruct a third-party valuation company to complete an appraisal of the property. The evaluator will consider recently sold properties that are similar and market conditions amongst other key factors to determine the market value of the property. The bank will lend the approved loan to value against either the purchase price as per the Form F or the valuation, whichever is lower.
Understanding that if the valuation of the property comes in lower may impact your lending is an important factor to consider when buying a property and it is recommended that a clause is in the Form F to protect you from undervaluation.
What happens with an undervaluation?
When a property is undervalued, it means the bank’s valuator has assessed the property and considering the data have decided the property is less than the agreed purchase price.
In this situation you would require a higher deposit as the bank will only lend the set percentage loan to value against the lower purchase price, meaning the buyer will have to bridge the difference themselves.
In most instances, buyers set a budget and an undervaluation could put them in a difficult position of raising further capital to complete the sale.
How can you avoid an undervaluation?
There are limited ways in which you can avoid an undervaluation, due diligence and market research is very important. However, it can be difficult, when a market has increased over a short period of time the comparable purchase price data may not be present at the time of valuation resulting in a ‘lower than expected value.
You can however mitigate this risk by requesting clauses to be stated in the Form F that in the event of an undervaluation you have the option to withdraw without penalty from the sale.
What loan to values can I expect to get from the banks in the UAE?
The central bank in the UAE regulates the maximum the banks can lend under specific circumstances which are based on two main factors; nationality and how many properties you have.
For a property purchase price below AED 5million the maximum loan-to-value (LTV) for an ex-pat is 80% and for a UAE national is 85%. For properties over AED 5million, this is reduced to 70% LTV for ex-pats and to 75% for UAE nationals.
Beyond central bank guidelines, the banks may impose further restrictions on loan-to-value based on the profile of the applicant. For example, non-resident financing can be up to 75% which carries more stringent checks in comparison to lower loan to values at 50% loan to value.
How can I guarantee my options?
It is recommended that you explore your options and secure a pre-approval with the loan to value that matches your expectations.
A pre-approval can be obtained before selecting a property and gives you comfort that you can comfortably make offers on properties subject to the property being evaluated by the bank.
