A bank will not lend 100% of the value of a property. The borrower needs to pay 20% to 30% in cash. The amount that the borrower pays in cash is referred to as the “deposit” or the “down payment”.
A deposit or down payment is a legal requirement for banks and is designed to protect both the bank and the borrower against future fluctuations.
UAE Central Bank regulations stipulate that a first time purchaser must have a minimum downpayment of 25% (20% for UAE nationals) plus related purchase costs before they can obtain a mortgage.
This downpayment cannot be funded by a personal loan and must constitute genuine savings.
For a first time purchase properties above AED5 million, the downpayment increases to 35% (30% for UAE nationals).
For the borrower the deposit lowers their monthly repayments and also means that from the start of the mortgage, they have some “equity” in the property. The equity is the percentage of the property that is debt free.
A cash deposit indicates that a borrower has the capacity to save. Someone that has no savings is probably already living beyond their means and is therefore unlikely to be able to afford a mortgage. From a bank’s perspective someone that cannot save is deemed to be too risky to lend money to.
When the bank is forced to sell a property to recover the mortgage given to the borrower, this is referred to as a “Foreclosure” or a “mortgagee sale”.
The down payment also protects the bank should the borrower fail to make their scheduled repayments and the bank is forced to sell the property to recover their money. Should this happen, the bank will incur legal and property disposal costs. The down payment gives them a buffer to absorb these additional costs & also covers any potential declines in the market value of the property to ensure that the asset does not fall into “negative equity”.
In addition to the down payment, borrowers also typically need to pay the associated purchase costs associated with the property (usually 5% to 7% of the purchase price) in cash. Some banks in the UAE will allow the borrower to add some of these purchase costs to the loan. This reduces the amount of cash that the borrower needs to pay out of his or her pocket to buy the property.