UAE homeowners planning to switch a home loan to a lower interest rate could face unwelcome news, with many banks now charging a 3 per cent fee for early settlement, mortgage brokers are warning.
The fees for changing to another lender can amount to tens of thousands of dirhams and even higher for large home loans, following a change bank fees caps a year ago by the Central Bank of the UAE.
“Once a client’s fixed-rate period is over, they cannot shift their mortgage to any other bank which might be providing a competitive rate," says Haresh Lalwani, the managing direct at Right Move, a mortgage broker.
Shifting a home loan to another lender after a fixed interest-rate period ends traditionally gives home-owners bargaining power and can reduce their repayments. Under the old rules, fees for early settlement were capped at 1 per cent or Dh10,000 dirhams, whichever was lower. The new bank fees cap the early settlement fee at a higher rate 3 per cent or the actual cost for the bank, whichever is lower.
“The cost applies to partial settlement charges based on the loan contract between the borrower and the respective bank. However, the cost cannot exceed 3 per cent of the outstanding or the actual cost incurred by the bank towards partially closing the loan, whichever is lower,” a UAE Central Bank spokesperson said via email.
The change comes as the Eibor, which banks use as a base to set mortgage interest rates, is at its highest in nearly a decade, meaning that home owners with fixed-term mortgages that expire may face a spike in their monthly repayments. At the same time, rents are declining across the UAE, potentially putting additional pressure on leveraged property owners.
Some banks have notified customers about the changes by sending customers a short text message alerting them that the terms and conditions have changed.
However brokers say the new fees are being applied to old contracts – with one bank even applying them to contracts going back as far as 2007.
Banks listing an up-to 3 per cent charge for early settlement when transferring a mortgage to another bank include Mashreq Bank, RAKBank, Abu Dhabi Commercial Bank and Emirates NBD. The banks did not comment on their fees when contacted by The National.
Some banks still have the old 1 per cent charge in place, including First Abu Dhabi Bank and Commercial Bank of Dubai, according to the fee schedules on their respective websites.
National Bank of Fujairah lists an early settlement fee “As per CB regulation”. “Early settlement fee at NBF is based on number of installments serviced by the customer and the profile of the customer,” says Colin Dallas, head of retail banking at NBF.
“We adopt a tiered approach based on the tenor of the loan and the relationship. The parameters are reviewed periodically in line with market conditions. These rates are transparent and are communicated to the customer at the time of onboarding."
For Pedro Silva, a Dubai pilot from Portugal, knowledge of the higher fee came the hard way. When his fixed-term mortgage with Emirates NBD expired at the end of last year, his repayments jumped from Dh8,500 dirhams to Dh10,500 a month for a mortgage on a townhouse in Mira, Dubai, where he lives with his wife, a school nurse.
After failing to negotiate a new deal with his bank, he received an offer from another bank. After taking several weeks to sort the details with Emirates NBD, he received a liability letter allowing him to transfer. He was then surprised to learn that the bank would charge him 3 per cent of the total loan to switch – amounting to almost Dh50,000.
Mr Silva believes his original mortgage contract specified that the fee would be 1 per cent or Dh10,000 whichever was less – the maximum previously allowed by the central bank.
But his contract also allows Emirates NBD to change the terms and condition at any time, says Mr Silva.
Mr Silva says he received a short text message on February 11, stating: “Dear Customer, the schedule of Fees and Charges for your Emirates NBD Home Loan will be revised effective 15th Feb." The message came six weeks after he began the initial proceedings, he says.
With the additional charge, shifting to another lender, even with an offer of 3.69 per cent, fixed for two years, was no longer cost-effective. Emirates NBD had offered him 4.5 per cent fixed for two years.
“I thought it was no brainer [to shift]. Only when I took it to the spreadsheet did I realise that it didn’t pay off, just for the sheer cost of the moving,” he says.
He ended up sticking with Emirates NBD and lodged a complaint with the central bank, via its consumer complaints portal on its website.
A representative for Emirates NBD did not comment on the case.
Experts say a 3 per cent fee of the outstanding loan amount means that most customers will be unable to find a deal with another bank that will produce that kind of savings over the duration of the new fixed term.
Chris Schutrups, managing director at MortageFinder, part of PropertyFinder Group, says most bank contracts – if not all – will have a clause that allows for a bank to adjust their fees at any time. “My word of warning would be that the banks who haven't put [the 3 per cent fee] in yet could still do it later down the line. There’s no point in chasing after this, because it could become the standard across all banks.”
The change to the early settlement fee was made by the regulator in response to complaints from lenders that they were incurring high costs from people switching frequently, even in the first year of home loans, says Mr Lalwani.
The move was made in June last year as part of wider changes, many of which reduced the caps on fees that banks can charge, described in a press release by the Central Bank as “a tool to protect consumers from anti-competitive and unfair practices”.
While the early settlement fee was changed to ‘Cost (max 3% of outstanding)’, banks were required to examine the basis and appropriateness of a fee calculation and – if applicable – charge lower fees than those prescribed in these caps, the central bank amendment said.
Nevertheless, brokers claim banks that have implemented the new 3 per cent fee are automatically charging the maximum amount except in rare cases such as for very large loans or when there is an extensive banking relationship.
“Since the Central Bank has said that they can charge up to 3%, everyone just jumped on to it and started charging 3 per cent, immaterial of what the actual charges amount to,” says one broker, who did not want to be named.
Along with property owners, mortgage brokers say they are also affected by the changes. Previously, around one third of the business at Right Move was remortgaging work, which has now dried up, says Mr Lalwani. In one case, a client with a very large mortgage was quoted Dh240,000 as an early settlement charge – 24 times higher than the previous maximum amount a bank could charge.
And even though some banks are still charging the old 1 per cent/Dh10,000 dirham fee, customers are still reluctant to move to banks with higher fees in place.
Mr Schutrups says customers who find themselves being quoted high buy-out fees from their bank should in the first instance take professional advice, or try to negotiate directly with the bank. “You do have some options because the banks will negotiate. So if you're on a follow on rate, it is worth speaking to them to negotiate it to fixed,” he says.
Banks may also be willing to lower the 3 per cent amount for customers who have very large mortgages, or who have products such as banking, credit cards, or even a personal loan, says Mr Schutrups. “They are willing to move on that 3 per cent because they’re making money in other parts the business, whereas if you’ve just taken the cheapest rate, done nothing with the bank, and want to buy out, that's a different story.”
There is a way to get around the higher fees though.
For customers who settle their mortgage early with cash or by selling the property, many banks still have the old fee structure in place, with 1 per cent fee capped at Dh10,000 dirhams. If a consumer is in a position to refinance another property or a home, or they have cash, they can pay the mortgage off, incur the 1 per cent fee, and then take out a fresh mortgage to get around the 3 per cent, suggests Mr Schutrups.
Those shopping for a new mortgage must read the fineprint of any mortgage contract carefully, says Mr Lalwani. “Go with a bank giving you more clarity in terms of all the rates and charges, and where everything is stipulated in the contract,” he adds.
Mr Silva, meanwhile, is urging other borrowers to be more vigilant. “It’s more important than ever for a new client to be completely aware of all the small print and details before signing a new mortgage. It should also come with increased disclosure from the banks and more transparency,” he says..