The Central Bank is seeking to promote the proper development, organization and regulation of the mortgage loans market in the United Arab Emirates (UAE).

In introducing these Regulations the Central bank wishes to ensure that banks, finance companies and other financial institutions providing mortgage loans to UAE nationals, GCC nationals and expatriates do so in accordance with best practice.

The Central Bank is also seeking to ensure that financial institutions have and maintain effective business standards and control frameworks in place for the granting of mortgage loans

These Regulations make a distinction between loans to owner occupiers of residential property and investors in residential property since the risk profile and due diligence required is distinctly different for each type of borrower

The objective of these Regulations is to set minimum acceptable standards for granting mortgage loans with a view to:

i. protecting the financial sector;
ii. fostering consumer protection; and
iii. enhancing financial stability.

These Regulations are issued pursuant to the powers vested in the Central Bank under Articles (5), (18), (94) and (96) of Union Law No (10) of 1980 concerning the Central Bank, the Monetary System and Organization of Banking.

These Regulations apply to:

a. Banks
b. Finance companies
c. Other financial institutions providing mortgage loans

For the purpose of these Regulations banks, finance companies and other financial institutions that provide mortgage loans are collectively referred to as ‘mortgage loan providers’.

These Regulations set minimum standards and regulated financial institutions are encouraged to apply higher standards in order to protect the financial soundness of their business. Nothing in these Regulations prevent mortgage loan providers from adopting more conservative limits in relation to granting mortgage loans where deemed appropriate.

1. Mortgage loan: A loan that is collateralized against a residential property granted for the purpose of constructing, purchasing or renovating a house for owner occupier or investment purposes. It also includes loans granted for the purchase or the development of land for these purposes.
    
2. Collateral: Property upon which the residential real estate loan is secured.
    
3. Collateral Management: All tasks and processes within granting of mortgage loans where collateral is involved, e.g. appraisal and constitution of collateral; confirmation of its legal existence and enforceability.
    
4. Debt Burden Ratio: Ratio of debt burden to income.
    
5. Down payment: Up-front payment from the buyer for a portion of the purchase price, which reduces the value of the loan against the property.
    
6. Equity: Difference between the appraised value of the property and the total claims held against the property.
    
7. Loan-to-Value (LTV): The ratio of the amount of the loan outstanding to the appraised value of the residential property.
    
8. Property appraisal: a comprehensive assessment of the property characteristics including the determination of the collateral’s value.
    
9. Mortgage loan providers: All banks, finance companies and other financial institutions that provide mortgage loans.
    
10. Tenor: The initial term length of a mortgage loan.

1. 1. Lending Policy
   
   All mortgage loan providers must have a separate mortgage lending policy in place which has been approved by the board of directors of the concerned institution.
   
   Mortgage loan providers should set a limit for this type of lending in relation to (a) exposure to property lending and (b) the overall loan book.
   
   The lending policy for mortgage loans must make a clear distinction between financing for owner occupiers and financing for investors and take account of the different risks involved.
   
   Lending policy must include, inter alia, detailed requirements in relation to verification of income and assessment of the borrower’s ability to repay, the maximum loan-to-value and tenor allowable for each type of loan, effective collateral management procedures for taking security against the loan and the application of the risk management framework in relation to this area of business.
   
   Mortgage loan providers are required to have robust procedures and processes in place to monitor completion schedules for the financing of properties being constructed. Where stage payments are to be made as part of the financing agreement, the mortgage loan provider must first use owner’s equity portion of the construction price to pay the developer/contractor before the mortgage loan provider provides any of the loan monies.
   
   Payments to the developer/contractor should be based upon prescribed completion milestones that must be physically confirmed either by the mortgage loan provider or by a suitably qualified professional agent who is independent from both the borrower and the developer/contractor.
   
   Lending policies must be reviewed and signed off by the board of directors of the mortgage loan provider, at least annually, and updated or amended as and when appropriate.
    
2. 2. Effective Verification of Income and Other Financial Information
   
   A key input to effective management of mortgage loans granting process is properly verifying the borrower’s ability to service the loan. Accordingly mortgage loan providers must have in place proper processes and procedures to ensure effective and accurate verification of income and other financial information which the lender will rely on to determine the borrower’s capacity to repay.
   
   Loan documentation should be designed to collect a full income and liabilities history for each applicant. A detailed record of the steps taken to verify income capacity along with full documentary evidence to support the decision (including a formal sign off by the appropriate approval authority) should be maintained on file and be available for inspection by the Central Bank’s examiners if required.
    
3. 3. Reasonable Debt Service Coverage
   
   Prudent granting of mortgage loans requires an accurate assessment of the borrower’s ability to repay the loan. This is an important factor in the context of:
    
   1. a. minimizing defaults and losses to the mortgage loan provider.
       
   2. b. limiting the possibility of consumer over-indebtedness; and
       
   3. c. maintaining stability in the financial system.
       
   Mortgage loan providers must establish appropriate processes to assess the borrower’s ability to repay the loan, review the processes regularly and maintain up-to date records of such processes.
   
   In making this assessment the mortgage loan providers must take into account all relevant factors that could impact on the ability of the borrower to repay the loan, including, for example, other debt servicing obligations (including credit card debt), security of employment and the individual’s particular ‘lifestyle’ expenditure. Only reliable and sustainable income should be included when making the assessment. Bonuses and other non-standard or temporary income should be suitably discounted or if not guaranteed excluded from the assessment of repayment.
   
   Mortgage loan providers should develop standard Debt Burden Ratio (DBR) calculation templates that enable lenders to gain a full understanding of the borrower’s financial capacity in order to make an informed decision on the borrower’s ability to service the new loan. The DBR assessment should include an appropriate amount calculated to cover normal recurring household expenditure commitments in addition to other liabilities.
   
   Where the loan extends beyond normal retirement age, lenders must take account of the adequacy of the borrower’s retirement income to repay the loan in making the assessment.
   
   Also, the prevailing interest rate environment shall be taken into account, as such a stress test should be carried out to determine whether the borrower could continue to repay the loan should interest rates rise.
   
   In the case of mortgage loans with deferred repayment of the principal in the first stage and interest only is paid, lenders must be satisfied that the borrower will be able to meet principal and interest payments arising at the end of that period, when assessing the borrower’s ability to repay the loan.
   
   The assessment of the borrower’s ability to repay should not be based on future property price appreciation or an expected increase in the borrower’s earning capacity.
    
4. 4. Appropriate Loan to Value Ratio (LTV)
   
   The taking of collateral is an important element in the lending decision. Accordingly, the Central Bank expects mortgage loan providers to adopt prudent LTV ratios when granting loans.
   
   Lenders must ensure that all loans granted are subject to an appropriate LTV that takes into account current, latent, or emerging risk factors that may impact on the value of the collateral and the lenders’ ability to realize it. The value of collateral should be suitably discounted to take account of these risk factors.
   
   The level of down payment required from the borrower should be drawn from the borrower’s own resources and not from other sources of borrowing (including personal loans or credit cards). The Central Bank expects mortgage loan providers lending policy to be explicit in this regard to ensure the borrower has an appropriate level of financial interest in the collateral.
   
   It is also important to note that the LTV ratios set out in these Regulations are the maximum allowable. Ultimately mortgage loan providers are responsible for ensuring their institutions remain financially sound. Accordingly, mortgage loan providers should adopt more conservative LTV ratios where the underlying risks in lending markets or segments of the lending markets are higher.
   
   Lending decisions should not be based solely on the security available and it is important that lenders do not rely on the LTV as an alternative to assessing repayment capacity. Mortgage loan providers must ensure that appropriate processes and procedures are in place to capture this risk.
    
5. 5. Effective Collateral Management
   
   Mortgage loan providers are required to have adequate internal risk management and collateral management processes in places that ensure property appraisals are realistic and substantiated. Property appraisal reports should not reflect expected future house price appreciation.
   
   Prior to any irrevocable commitment to lend an independent on-site valuation of the property must be undertaken by a professional third party who is suitably qualified and independent of the borrower, seller, developer/contractor and the loan decision process.
   
   Based on clear evaluation criteria, each bank and finance company should have in place a board approved list of independent Valuers.
   
   All legal titles must be free from encumbrances and contain no impediments for the registration of security interests. In the case of land gifted to UAE Nationals confirmation of the gift from either The relevant Diwan, or Housing Program, as well as confirmation from the land department is required.
    
6. 6. Due Diligence
   
   In order to limit and mitigate the risk arising from mortgage loans business, mortgage loan providers must have in place a clear written program of due diligence (legal and other) to be followed during all stages of the application process to ensure lending policies are being implemented correctly. Procedures must also be in place to ensure that, prior to drawdown, all conditions attaching to the loan have been (or are being) complied with.

1. 1. Debt Burden Ratio (DBR)
   
   The maximum DBR allowed is set out in “Regulations Regarding Bank Loans and Other Services Offered to Individual Customers”- i.e. 50 percent of gross salary and any regular income from a defined and specific source at any time’. It is important however that when making an assessment of the borrower’s ability to repay, financial institutions do not automatically apply the maximum DBR and take into account the specific circumstances of the borrower and the exposure to the institution.
   
   In arriving at the DBR, mortgage loan providers are required to stress test the loan at (2 to 4) percentage points above the current rate of interest on the loan, depending upon what level interest rates are at in the cycle. Where an introductory interest rate applies the stress test should be carried with reference to the rate that will apply on cessation of the introductory rate.
   
   Where the property is for investment purposes mortgage loan providers are required to make a deduction of at least two months’ rental income from the DBR calculation to assess the borrower’s ability to repay taking account of non-rental periods.
   
   Where the loan repayment schedule extends beyond the expected retirement age, mortgage loan providers are required to ensure that the balance outstanding at that time can continue to be serviced at a DBR of 50 percent of the borrower’s post retirement income.
    
2. 2. Loan to Value Ratio (LTV)
   
   The maximum Loan to Value (LTV) ratio are as follows:
3. 1. A. UAE Nationals
      • First House/Owner Occupier

      Each borrower can only claim one property under this category.

   2. a. Value of Property less or equal to AED 5 million - maximum 85% of the value of the property.
       
   3. b. Value of Property more than AED 5 million - maximum 75% of the value of the property.
       
   4. • Second and Subsequent House or Investment Property
      
      65% of the value of the property, regardless of value.
       
   5. B. Expatriates
   6. • First House/Owner Occupier

      Each borrower can only claim one property under this category.

   7. a. Value of Property less than AED 5 million - maximum 80% of the value of the property.
       
   8. b. Value of Property more than AED 5 million – maximum 70% of the value of the property.
      
      Second and Subsequent House or Investment Property
      60% of the value of the property, regardless of value.
       
   9. C. All Categories - Property purchased off plans
      
      Given the long term nature of the development process and the higher level of risk to completion, the maximum LTV for mortgages on property being purchased off plans is 50% regardless of purpose, value, or category of purchaser.
       
4. 
    
5. 3. Maximum Term of Loan
   
   The maximum tenor of the mortgage loan is 25 years.
6.  
7. The maximum age at the time of the last repayment should be determined by the mortgage loan providers in accordance with their risk management and lending policies.
   .
8. 4. Maximum Financing Amount
   
   As per Article 3.1, the DBR cannot exceed 50%.
   
   In addition, the maximum financing amount allowed is as follows:
    
   1. • UAE Nationals: up to 8 years annual income.
       
   2. • Expatriates: up to 7 years annual income.
       
9. 5. Source and Frequency of Repayment
   
   Repayment should be made from salary or verifiable business or rental income. The use of ‘End of Service Benefit’ is not allowed.
   
   Principal and interest repayments should be made on a reducing balance basis (except for mortgage loans with differed repayment of principal – treated as per 6 below).
   
   Repayments should be at a frequency not less than quarterly. The Central Bank would expect there to be minimum exceptions to this policy.
    
10. 6. Interest Only Period
    
    Mortgage loans with deferred principal repayment should only apply to investment loans. These loans should not allow for non-repayment of principal for longer than 5 years from date of first drawdown of the loan.
     
11. 7. Acceptable Collateral
    
    A first class mortgage in the name of the mortgage loan provider must be taken on all financed properties.
    
    In cases where the property being financed falls under the various Government Housing Schemes and a first charge cannot be created, mortgage loan providers should have other means in place to protect the loan collateral including the taking of a second charge on the mortgaged property where possible.

Lenders should provide the borrower with sufficient and transparent information, including costs and risks associated with the loan, to enable the borrower to make an informed assessment of the suitability of the loan to their needs and financial circumstances.

There should be transparency in preparing and publishing all fees, charges and interest rates (or profits) including the method of calculating interest/profit.

Loan documentation should include, inter alia, the details of the property or the development, the borrower’s contribution, the amount of the loan, the repayment period, the periodic installment, the interest/profit rate, insurance requirement, mode and method of disbursement, the milestones required for progress payments in case of properties under construction with a clear pre-payment policy. For fees and charges it should be detailed in a separate schedule to be attached to the loan contract.

Borrowers should be provided with information setting out the total cost of the loan during its lifetime. The borrower must sign each page of the loan documentation and be given a copy signed by both the mortgage loan provider and the borrower.

The maximum charges to refinance with other banks or financial institutions or for early repayments are the actual cost (to break fixed loans) to the lender and/or fees and charges as set out in Regulations No. 29/2011. There should also be no impediment for borrowers to refinance with other institutions.

Financial institutions should also follow the transparency and disclosure requirements for real-estate lending in accordance with Regulations No. 29/2011.

Mortgage loan providers are not allowed to alter or vary terms and conditions of the loan or the facility during the tenor of the loan or the facility, unless agreed to in writing by the borrower. In case of changes to the commissions or fees, customers must be notified, at least, two months prior to implementation of such changes.

The Central Bank wishes to support specific Government housing programs that are established for the purpose of serving society for the betterment of communities and individuals.

The Central Bank will engage with such programs directly and seek to agree a more preferential regulatory treatment where loans under such programs are guaranteed by the Government.

Where the loan amount advanced to a UAE National to construct or purchase a property for ‘owner occupation purposes’ under a local housing program is guaranteed, the maximum DBR allowable is increased to 60 percent.

The maximum LTV allowable may be increased to 85 percent when the value of the property is AED 5 million or less.

Certain mortgage loan providers will be providing mortgage finance in accordance with Shari’ah principles.

While it is recognized that Islamic finance has specific features, an institution offering Islamic financial services is generally exposed to the same types of risks as a conventional mortgage loan provider.

In addition to observing the specific requirements set out by the Shari’ah advisory committees given under each mode of financing separately, the requirements laid down in these Regulations should also be complied with while granting mortgage loans under Shari’ah principles.

Reporting requirements will be as set out in the Central Bank’s online periodic Banking Return Forms system.

The Central Bank will monitor and supervise the implementation of these Regulations and take appropriate regulatory action where breaches occur.

In implementing these Regulations the Central Bank expects mortgage loan providers to apply ‘substance over form’ in making lending decisions and have appropriate policies and procedures in place to ensure that requirements of these Regulations are not circumvented. The Central Bank will be mindful of schemes or vehicles some mortgage loan providers may establish to circumvent these Regulations and shall take appropriate action as necessary.

The Central Bank reserves the right to alter any of the “Important Ratios” contained in these Regulations either globally, or for an individual mortgage loan provider, where it so deems appropriate

The Legal Development Unit of the Central Bank shall be the reference for interpretation of the provisions of these Regulations.

Notice number 3871/2012 is withdrawn from the date these Regulations become effective.

These Regulations shall be published in the Official Gazette in both Arabic and English and shall come into effect one month from the date of publication.