UAE Property: Can You Use A Personal Loan To Fund Your Mortgage Down Payment?

(MENAFN- Khaleej Times) Question: I understand that when buying a home in the UAE, I need to have a certain amount available as a down payment before financing the rest. Is it legal to finance that initial amount through a personal loan?

Answer: Pursuant to your query, the provisions of the UAE Central Bank mortgage regulations shall apply.

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The UAE Central Bank has expressly addressed the source of the down payment required for obtaining mortgage financing in the UAE. Under Article (2), paragraph 4 (Appropriate Loan to Value Ratio) of the Central Bank Board of Directors' Resolution No. 96/By Circulation/2019 Amending Circular No. 31/2013 on Regulations regarding Mortgage Loans ( the “Resolution No. 96/By Circulation/2019 Amending Circular No. 31/2013”) , provides that:

“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.”

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The Article 1 (5) of the Resolution No. 96/By Circulation/2019 Amending Circular No. 31/2013 define “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.”

Accordingly, where a purchaser is obtaining mortgage financing to acquire a property, the portion of the purchase price that the purchaser is required to contribute as the down payment cannot be financed through a personal loan or credit card facility. The applicable regulatory framework requires that such contribution be sourced from the purchaser's own resources.

This should, however, be distinguished from the general legality of obtaining a personal loan. The Central Bank's regulations separately permit licensed banks and finance companies to provide personal loans to individuals, subject to the applicable eligibility, repayment and debt-burden requirements. Under the Central Bank's regulations concerning bank loans and other services offered to individual customers, a personal loan is a loan repayable from salary, end-of-service benefits and/or other verifiable regular income from a well-defined source.

Therefore, obtaining a personal loan is not, in itself, prohibited; however, using such personal-loan proceeds to fund the down payment required for a mortgage would not comply with the Central Bank's mortgage-lending requirements.

Further, the Article 3 (2) (B) of the Resolution No. 96/By Circulation/2019 Amending Circular No. 31/2013, provides for the maximum Loan to Value (LTV) ratio as follows:

“B. Expatriates

First House/Owner Occupier

Each borrower can only claim one property under this category.

a. Value of Property less than Dh 5 million - maximum 80% of the value of the property.

b. Value of Property more than Dh 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.”

For completeness, the applicable mortgage regulations also prescribe maximum Loan-to-Value (“LTV”) ratios. For example, for an expatriate purchasing a first home/owner-occupied property, the maximum LTV is 80% for a property valued at Dh5 million or less and 70% for a property valued above Dh5 million. In respect of a second or subsequent house or investment property, the maximum LTV is 60% of the value of the property, regardless of its value. Consequently, a purchaser would generally be required to contribute the balance from their own resources, subject to the specific circumstances and the lender's assessment.

In case of a property purchased off-plan, the maximum LTV is 50% of the value of the property, regardless of the purpose of the purchase, the value of the property, or the category of the purchaser. Accordingly, a purchaser would generally be required to contribute the remaining 50% from their own resources, subject to the applicable requirements. This is in accordance with the Article 3 (2) (C) of the Resolution No. 96/By Circulation/2019 Amending Circular No. 31/2013,

“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.”

In accordance with the aforementioned provision of the law, a purchaser may not be able to borrow the amount required for the mortgage down payment through a separate personal loan, under the Central Bank's mortgage-lending regulations.

Applicable Law:

1. Central Bank Board of Directors' Resolution No. 96/By Circulation/2019 Amending Circular No. 31/2013 on Regulations regarding Mortgage Loans

Disclaimer: The information provided above is intended for general guidance and does not constitute legal advice. It is recommended to seek formal legal counsel.

Ashish Mehta is the founder and Managing Partner of Ashish Mehta & Associates. He is qualified to practise law in Dubai, the United Kingdom and India. Full details of his firm on: . Readers may e-mail their questions to: ... or send them to Legal View, Khaleej Times, PO Box 11243, Dubai.

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