UAE homeowners use equity release loans to buy more properties

Most prefer to leverage capital than take out a personal loan amid rising property values and lower interest rates

The UAE has recorded a significant rise in property values over the past three years. Chris Whiteoak / The National

Homeowners in the UAE are increasingly opting to use the equity tied up in their properties to grow their investments as real estate values continue to appreciate.

Equity release provides owners access to a lump sum of capital, which can be used to finance another property or refurbish an existing property.

Natasha Hatherall, founder and chief executive of TishTash marketing and public relations agency in Dubai, recently released equity from her property on The Palm Jumeirah in Dubai to make some of her other financial goals a reality.

“After owning property for more than 10 years in the UAE, we took a relatively small amount of equity out of our main home property, which only has a small mortgage now, but over Dh6 million [$1.6 million] in equity in it,” she says.

“Our mortgage bank would only let us equity release for two purposes – renovation or other property purchase and they were very strict on documentation and ensuring this was the case.

“We took a relatively small Dh1 million equity out of our main home to buy two investment properties (plus other savings) in the UAE to make better use of our money as currently very little is performing savings wise and we’d actually lost money over the years recently. I’m a big advocate for property and this is part of my retirement strategy and plans to diversify my income.”

Ms Hatherall used the funds from the equity release to buy two new and ready-to-rent smaller investment properties on the secondary market in Dubai’s Jumeirah Village Circle.

She is currently earning investment returns of more than 10 per cent from the rental properties, “which is not possible on most other savings options right now”.

Since she had a lot of equity in the property, it made perfect sense to opt for equity release rather than a personal loan, says Ms Hatherall, who bought her current home two years ago, but has been a property owner on The Palm for 10 years.

“I don’t believe many banks are giving out cash without proof of use. In a booming property market, coupled with an unstable global economy, this could be problematic in the wrong hands or with bad intentions,” she says.

“For us, we used it sensibly to achieve our other goals and knowing that it was all part of assets we could sell if we ever needed to.”

The UAE property market has been booming in recent years on the back of government initiatives such as residency permits for retired and remote workers and the expansion of the 10-year golden visa programme.

Overall growth in the UAE’s economy due to diversification efforts is also supporting the property market.

Property prices increased in Dubai during the second quarter of this year, according to the latest report from property management company Asteco.

Apartment sales prices rose by 5 per cent and villa prices by 8 per cent during the period, Asteco said.

“In today’s market, which has seen a significant rise in property values over the past three years, many homeowners have benefited from the increased equity in their assets,” according to Sawan Karia, director of broker channel at mortgage broker Huspy.

“There has never been a better time for equity release than now. Current equity release rates are available at an average of approximately 4 per cent, while the return on investment for real estate assets can yield between 5 per cent to 10 per cent.

“As buyers benefit from increased equity in their current assets, releasing this equity and utilising it for further purchases could be highly financially advantageous. For those who use the funds for home improvements, this can directly enhance the value of the existing asset.”

According to the UAE Central Bank guidelines, an equity release can only be utilised for specific purposes: either for further real estate purchases within the UAE or for home improvements.

Huspy has recorded a growth of 34 per cent in equity release transactions in 2024 compared to last year.

An equity release can either be a pure equity release on an unencumbered or mortgage-free property, or a buyout/remortgage plus equity, Mr Karia says.

Eligibility for equity release is not restricted to people who have completely paid off their mortgage. Mortgage-free properties can qualify for equity release, while those with existing mortgages may still access funds through a product known as “buyout plus equity”, he says.

“Applicants must meet the bank’s lending criteria, including profile and affordability checks. Many financial institutions require the equity amount to be paid directly to the vendor or contractor,” he says.

The typical tenure for equity release matches that of resale mortgages, allowing employed applicants to extend up to age 65 and self-employed applicants to age 70, with a maximum term of 25 years.

The maximum value limit varies by bank; some institutions may offer the maximum loan-to-value ratio permitted by the Central Bank, which is 80 per cent LTV for expatriates holding their first mortgage on a property valued up to Dh5 million, according to Huspy.

Most banks primarily offer equity release options for residents only.

Banks generally classify equity release and resale mortgages in a similar category regarding interest rates, according to Mr Karia.

“Mortgages utilise a reducing balance approach, where monthly payments address both capital and interest, leading to a decrease in interest costs as the principal decreases,” he says.

“In contrast, personal loans often apply a flat interest rate for the entire term, which tends to make them more expensive overall.”

Michael Hunter, chief executive of mortgage broker Holo, says banks generally require a clear understanding of how the released funds will be used.

In some cases, banks may ask for evidence to support this. Once the purpose is established, standard affordability checks will apply, ensuring that the equity release is manageable based on the applicant’s income.

“As interest rates are currently dropping and are expected to continue doing so over the next 12 months, now is an advantageous time to consider equity release. However, it’s vital to ensure that you can comfortably manage the repayments on the new loan amount,” Mr Hunter says.

“It’s essential to compare your outstanding loan amount with the current market value of your property. This will help determine the available equity that can be accessed.”

Rajender Prasad, managing director of Dubai-based independent mortgage advisory firm Money Maestro, warned homeowners to be mindful when accepting further leverage against their real estate portfolio.

An important criterion for equity release is the applicant’s debt over income ratio, which suggests peoples’ further loan entitlement and repayment capacity, Mr Prasad says.

A second important aspect is the property’s present market appraisal, which dictates the LTV ratio and allows banks to decide the amount of equity release.

“Irrespective of many lucrative offers from banks, it’s the individual’s responsibility of loan repayment and meeting banks’ terms and conditions. Borrowers must ensure the wise use of new funds and avoid increasing new debts, which may lead them to bigger financial obligations,” he says.

“Any individual aspiring for equity release must be aware of their job continuity and stability, repayment capacity, unforeseen financial commitments, and other monetary contingencies. Borrowers must also understand the bank’s security and covenants associated with the property loan agreement.”