Loan to value is the term used by banks when lending against an asset. In most scenarios, this will be a property. The percentage relates to how much the bank is willing to lend against the value of the asset.
There are several important points to understand when it comes to loan-to-value (LTV) and what the bank will base the LTV against.
Firstly, the bank will instruct a third-party valuation company to complete an appraisal of the property. The evaluator will consider recently sold properties that are similar and market conditions, among other key factors, to determine the market value of the property. The bank will lend the approved loan to value against either the purchase price as per Form F or the valuation, whichever is lower.
Understanding that if the valuation of the property comes in lower than expected, it may impact your lending is an important factor to consider when buying a property, and it is recommended that a clause be in the Form F to protect you from undervaluation.
When a property is undervalued, it means the bank's valuator has assessed the property and, considering the data, has decided the property is less than the agreed-upon purchase price.
In this situation, you would require a higher deposit as the bank will only lend the set percentage loan to value against the lower purchase price, meaning the buyer will have to bridge the difference themselves.
In most instances, buyers set a budget, and an undervaluation could put them in the difficult position of raising further capital to complete the sale.
There are limited ways in which you can avoid undervaluation; due diligence and market research are very important. However, it can be difficult when a market has increased over a short period of time and the comparable purchase price data may not be present at the time of valuation, resulting in a lower than expected value.
You can, however, mitigate this risk by requesting that clauses in Form F state that, in the event of an undervaluation, you have the option to withdraw from the sale without penalty.
The central bank in the UAE regulates the maximum the banks can lend under specific circumstances, which are based on two main factors: nationality and how many properties you have.
For a property purchase price below AED 5 million, the maximum loan-to-value (LTV) for an expat is 80%, and for a UAE national, it is 85%. For properties over AED 5 million, this is reduced to 70% LTV for expats and to 75% for UAE nationals.
Beyond central bank guidelines, the banks may impose further restrictions on loan-to-value based on the profile of the applicant. For example, non-resident financing can be up to 75%, which carries more stringent checks in comparison to lower loan-to-value ratios at 50% loan-to-value.
It is recommended that you explore your options and secure a pre-approval for the loan that matches your expectations.
A pre-approval can be obtained before selecting a property and gives you the comfort that you can comfortably make offers on properties subject to the property being evaluated by the bank.
You can search for all the best-matched products by applying with useholo.com on our digital mortgage platform, giving you the ability to manage, apply, and track your application from start to finish with full support from the Holo team.
This blog is for educational purposes, but everyone's case is unique, and local guidelines and regulations may change. Our mortgage advisors can help you with any question you may have and have the latest advice. Get in touch.