In May HSBC will launch a new Shariah compliant,
capital guaranteed note denominated in dirhams. Investors in this note
can use it as security for 5% home loans, the latest example of lower
US interest rates finding a way into the UAE home loan market where
typical mortgage rates are a high 7.5%.
The Amanah Premium Deposit Plus is a three-year, capital guaranteed
term deposit that also provides an opportunity to earn a profit based
on any positive performance of a basket of equally weighted global
agriculture, clean energy and healthcare stocks, determined at the end
of the three-year term.
Then the payout will be equal to 100% of capital invested, plus the
performance of the basket of stocks which has a maximum profit capped
of 27%.
HSBC capital protected notes are a well respected and popular
investment, particularly among nationals and expatriates looking for a
higher return than a deposit account with no capital risk. The note
achieves this result by investing most of the funds in almost risk free
treasury bonds and the balance, which would normally be paid as
interest, goes into a more risky, high-return asset class.
Home loan security
The maximum return cap of 27% in the case of
these notes suggests the bank expects strong performance, but this part
is not guaranteed. However, what is interesting to prospective home
loans is that these notes can be used as security for home loans that
are cheaper than normal mortgage rates, a highly competitive 5%.
Investors in these notes should, therefore, win twice over if they
use the notes as security for a home loan: first on the investment
return from the note itself; and secondly from the lower cost of home
finance.
This is just the latest example of how ultra-low US interest rates, now down to 2.25%, are finding their way into the
UAE
housing market. So far mortgage firms and banks have been reluctant to
pass on falling local discount rates to home loan customers.
In a sellers’ market, with people desperate to secure home funding,
they argue there is no incentive to lower their rates. But market
forces do always drive participants towards lower costs.
Competition hotter
The Commercial Bank of Dubai
has rapidly become the UAE’s third bank for mortgage lending with its
risk-based pricing model since its launch only last December. And
customers have been attracted to Lloyds TSB's dollar-based mortgage product for
UAE
property, offering a double-bonus in the event of revaluation (provided
your wage is not paid in dirhams or your equity is based in a foreign
currency).
Omniyat Holdings announced this week that it is to launch a $1bn
Islamic mortgage finance company later this year or early next. It will
become the UAE’s 24th mortgage lender, and increase competition.
The clever home buyer will always seek out the lowest cost of funds
for highest total gains. Even a fraction of a percentage point off the
cost of a loan over a number of years can considerably boost the total
internal rate of return on this investment. It is well worth the time
and effort spent securing the best deal.
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