UAE: Trapped in mortgage debt? Here's how borrowers can get out of the web

If you are wondering which one is best suited for you, here is what you need to know

By Jaya Ratnani

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Photo for illustrative purposes only. — File photo
Photo for illustrative purposes only. — File photo

Published: Sun 31 Dec 2023, 3:05 PM

Last updated: Sun 31 Dec 2023, 11:49 PM

When it comes to purchasing your dream home, a mortgage loan can be a very attractive option to receive financial support. But it’s not uncommon for a borrower to hit a roadblock in paying off the mortgage debt, particularly during a trying economic situation.

In such circumstances, some homeowners may want to move out of the UAE altogether to escape their mortgage commitments, but leaving the country will not help in getting rid of the mortgage debt. As time passes, this mortgage with its interests and penalties can turn into a monstrous sum.

There are options that can help to mitigate a mortgage debt situation. There are debt settlement, debt restructuring and declaration of bankruptcy to name a few.

If you are wondering which one is best suited for you and the option that will hurt you the least, here is what you need to know:

Debt settlement

A debt settlement is a plan in which you negotiate with the creditor to allow you to pay a lump sum that is substantially lower than the amount owed.

The plan includes the liquidation of the asset. If it is not possible to cover the outstanding loan amount through the sale proceedings, the shortfall may be negotiated with the bank.

Because you stop making payments and won’t be paying your debts in full, this will affect your credit rating for several years after the final payment. It will also take a substantial amount of time to restore enough credit.

Insolvency / bankruptcy

This law supports borrowers from legal persecution and offers a three-year plan to settle financial obligations with the help of court-appointed experts.

This should be the last option as it can damage the credit score for a long time. It shows that you have exhausted all your revenue sources, which means creditors will be wary and may refuse to loan money altogether in the future to apply for credit cards or loans.

Debt restructuring

This is a legal way in which you can alter the terms of your mortgage contract to repay your outstanding debt obligations. Based on your financial situation and repayment track record, banks can provide you relief with an extended timeline, lower-interest-rate or step-up option for your mortgage debt.

Jaya Ratnani is a managing partner at Freed Financial Services
Jaya Ratnani is a managing partner at Freed Financial Services

The five-step process for debt restructuring is:

1. Before you plan to talk to your bank, you will have to create a summary of your current financial situation. It should include all outgoing expenses and other debts including credit cards and personal loans. Follow a total transparency protocol.

2. The next step should be keeping an account of your current expenditures including personal living expenses, education expenses, medical etc to help the bank realise that you will fall short of paying the monthly instalment amount on your mortgage.

3. The restructuring evaluation will be based on total household income including the rental income of the property and spouse income. Ensure you have all the proofs available when discussing with the bank.

4. Continue to make payments to the bank even at the reduced sum, which will go a long way to display your intent to pay despite the reduced ability.

5. Approach the bank with all the paperwork and data you have collected to figure out a repayment strategy. Be persistent in your approach by providing all relevant information and data required by the bank.

Factors that can affect your chances?

There is no single plan that fits every mortgage borrower for restructuring. The chance of receiving it depends on many factors such as:

● Your credit history that measures your ability to pay the mortgage before you faced a financial crisis

● Even though UAE banks have scrapped the 70-year upper age limit for borrowers, your age and capacity to work will play a role in the bank’s decision

● The market value of the property will play a critical role. If the property value covers the current loan outstanding the bank can demand for foreclosure of the loan rather than restructuring of the loan

● If you are married, you will also have to submit the financial record of your spouse to provide complete transparency.

Depending on these factors and more, banks can reduce the interest rate of the loan, increase the loan tenure, provide a payment holiday or reschedule the interest and principal payments.

Jaya Ratnani is a managing partner at Freed Financial Services. The views expressed are her own.

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