Dubai Islamic mortgage lender Tamweel has ended its two year moratorium on new lending this week, after Dubai Islamic Bank (DIB) stepped in with a bailout, which increased its stake in Tamweel from about 21 per cent to 57.3 per cent.
While its rates are competitive they are not going to be the best, and the effect of their re-entry to the market is expected to be limited, not least because we don’t know as yet how strict the bank’s lending criteria will be.
“We are not sure if there are hidden qualification factors that will prevent many potential buyers from being able to secure a mortgage with Tamweel,” said James Gauduchon, the manager of corporate marketing at Better Homes, a property brokerage in Dubai.
Rates wise it seems that Tamweel are only just competitive when we look around the market. The bank’s is to charge 7.4 percent per year, plus between 0.5 and 1.5 percentage points based on customers’ income levels and other factors. On top of that the bank is to charging 1% processing fee on 25 year Islamic mortgages. Customers can borrow a maximum of Dh5 million (US$1.3m) to buy up to two properties.
As we can see this is considerably more than the 4.5% base rate offered by NBD. However, NBD customers will also pay a rate based on a spread of rates in the prevailing credit markets. That is currently an additional 4.25% for expatriate customers according to a spokesperson at the bank. This makes the Tamweel rate competitive for the moment.
It is also competitive against HSBC, the largest foreign bank in the country. Their rates are currently between 6.25% and 6.7%, with an additional spread based on the three-month Emirates interbank offered rate, which is currently around 2.15%.
So Tamweel is competitive for the moment. For the moment, because business model’s like Tamweel, which are only lenders and not banks incur higher charges when raising finance for lending. The backing of DIB’s customer deposits and balance sheet should help in this respect.
Tamweel froze lending in 2008 when its business model — reliant on short term debt to fund its loan portfolio — emerged as risky, after massive defaults in US mortgage backed securities infected the global economy.
Their re-entry has been met with a mixture of responses, ranging from optimism to scepticism.
“Now that prices are reasonable in most areas, a mortgage with an attractive rate of interest over an extended period might kick-start a buying trend for units that fall beneath the Dh5m mark,” said Gauduchon.
The restart in lending is “probably more symbolic”, said Chet Riley, a property analyst at Nomura in Dubai.
“Tamweel now is getting access to DIB’s deposit book to allow them to lend a little more but in the scale of lending [it] is not a big deal.”
The common response is that this is ultimately a positive development, but how positive will depend on the size of pot the lender has available from DIB, and how selective it will be about who it lends to. Time will tell.
Photo credits: J.C. via Flickr