Down Payment for second MortgageDeposit for the second mortgage
A more interesting development in Saudi Arabia's finance sectors in 2015-16 is the regulatory focus on the emerging mortgage economy in the Kingdom. Mortgage lending, as in many regional national economies, has historically been a minor factor in the functioning of the residential property markets, largely due to Scharia rules prohibiting the granting or receipt of interest.
Nevertheless, demographic expansion and a burgeoning centre layer have placed significant burdens on rental prices across the MENA area, and bank practice has developed to meet the increasing demand for new dwellings. Thus, in the Gulf, modern mortgage issuing sectors have emerged with remarkably high speeds. "Long run apartment sales will be higher than, for example, the quick rise in hotel sales, so we should concentrate on this area," said Naif Al Baz, Deutsche Gulf Finance chief executive officer, to OBG.
At the turn of the 20th and 20th centuries, in the case of the Kingdom, the sector began to experience serious growth, and within a decade it had grown to such an extend that mortgage suppliers offered loans with a down payment of 0% - mortgage givers in Saudi Arabia were pioneers of this practise. A number of issues of fiscal instability have arisen, all of which were addressed with new severity as the 2008 fiscal turmoil caused real estate bubbles within the US and European mature market.
The share of mortgages in Saudi Arabia's overall retail loans increased further during this time and more than doubled between 2008 and 2013 - from SR14. $4bn ($10.2bn) - according to the sector's supervisory authority, the Saudi Arabian Monetary Authority (SAMA). Not only did the topic start to emerge as a regulatorial agenda, but it also attracted the interest of the global banking world, in particular in the IMF's consultation on Art. IV 2013 that the share of bank property financing to private persons had increased by more than 25% per year since early 2011.
SAMA introduced the Real Estate Mortgage and Financing Acts - a series of five laws - in November 2014 to address a wide range of activities and approaches such as the preparation and incorporation of mortgage loans, the privileges and liabilities of mortgage providers and creditors, supervision (subject to SAMA), financial leasing agreements and the policies and procedures for reclaiming an asset in the event of default by a debtor, the formation and functioning of financial institutions and other issues related to execution.
Sector analysts noted at the outset that this would have a significant impact on a mortgage instrument trading environment where 100% LTV rates were common and increased the risks of foreclosing financing to prospective buyers. Europe's such as Finland regulates 90%, while the UK's advanced LTV sector has a typical 95% population.
The negotiation of the close boundary between people's demands for living space and maintaining the economic equilibrium of the country is a balance act that the legal systems of the globe have had to achieve in recent years, and in any case the approaches vary according to the specificities of the respective economies.
Results, which began to be captured in early 2016, showed that the enhanced resilience of the new rules was, as anticipated, associated with costs for the rental property markets. Jones Lang LaSalle, a provider of business property management solutions, reports that the number of UK home purchases fell by 5% by November 2015.
In view of the protective character of mortgage requests, this number can underestimate the real extent of the effect: mortgage income fell by 70% between 2014 and 2015, according to mortgage lenders. According to sector analysts, the key theme was simple: the constant increase in home values over several years had made a 30% deposit on a home buying contract prohibitive for a large part of the people.
Specialist construction financing entities were particularly affected by the LTV sector introduced by the 2014 law. While many of these businesses had been awaiting the adoption of mortgage law, they were now faced with major issues. There are two major drawbacks to the six residential mortgage lenders currently in competition with mortgage banks: more costly conditions than their bank counterparts and the failure to offer mortgage loans with other financial instruments through large retail chains.
Therefore, the changes made by SAMA to the mortgage rules in 2016 were particularly welcome by the country's residential mortgage lenders. In February 2016, SAMA changed its policy to allow residential financiers to fund 85% of the value of real estate, given the need to improve competitive conditions for banking and specialised financiers.
Business lending institutions will remain within the 70 per cent LTV threshold, with the exclusion of mortgage loans granted to the approximately 450,000 citizens on a waitlist of the Department of Housing, who will get 70 per cent funding from their institution on ordinary conditions and a further 15 per cent from the Department for a combined 85 per cent.
With the new LTV values, the obligation to make deposits for the purchasers of residential construction financing associations and the large number of banking purchasers on the Ministry of Housing's waitlist was lowered from 30% to 15%, thus facilitating easier liquidity for them. Better conditions for the financing enterprises will help them to surmount the handicaps they face vis-à-vis business banking.
It is important for the long-term viability of the emerging residential mortgage lending business, which requires a wider eco-system than bank alone can offer if it is to become a fully fledged industrial economy. There are many different kinds of mortgage lenders working together in many countries to offer customers funding. As an example, under the originate-to-sell scheme already in place in the UK, specialist property financiers carry out operations that they keep provisionally on their books before reselling them to an investor - choosing bank.
Therefore, the Kingdom's banking institutions act as asset backers and bookkeepers, a function they will be happy to take on in view of the opportunities for return. Increased interactions and increased rivalry between banking and mortgage lenders are also important with regard to innovative building materials. Elsewhere in the area, other up-and-coming mortgage sectors have seen the launch of amenities such as unpunished funding, second mortgage at favorable conditions and mortgage loans with interest rates high.
For example, the capacity to lend against cumulative home ownership capital enables home buyers to directly tap into their property assets and lend large sums of money as home values rise. SAMA' s easing of the new mortgage rules is a blessing for home buyers and banks and should support credit level expansion and credit design in the years ahead.
In the meantime, a further branch switch should continue to rock the markets. By 2015, it was heralded that the state-owned Real Estate Development Fund (REDF), which provides home loan facilities of up to 500,000 SR ($133,000), would be transformed into a banking institution mandated to work with the residential sectors to resolve the Saudi Arabian home crisis.