At the trading company where I work, a new customer does not get credit terms because they asked nicely. Credit control takes their financials, sets a limit off a fraction of what they can demonstrably pay, and the limit has an expiry date. If nothing ships within it, the file is re-run from scratch. A mortgage pre-approval is the same document, pointed at me. It helps to know which four numbers the bank is actually running, because the sales call only ever quotes the first one.
What a mortgage pre-approval actually is, and what it is not
HSBC’s own page defines its Approval in Principle as “an indication from a bank or financial institution of how much they could be willing to lend you to buy a property”, adds that it “is not a guarantee of a home loan”, says “it’s free”, and says it is “valid for 60 calendar days”. Emirates NBD’s application page lists what it wants before it will say anything: passport, visa and Emirates ID, a “Salary Certificate addressed to Emirates NBD” (with three months of payslips “if there is more than a 10% variance in salary”), and the “Last 6-month’s Bank Statement”. The pre-approval is what comes back after those documents and an Etihad Credit Bureau pull, before any property has been valued.
That last part is the point. A pre-approval prices the borrower. The final offer prices the borrower and the property, and the valuation, the title check and the developer’s paperwork all happen in the second step. So the letter is a ceiling on the loan, which is a ceiling on the price, and nothing more.
The four ceilings, in the order the bank runs them
The rules are in the Central Bank’s mortgage regulation, Circular 31/2013, Article 3. Each one is a separate cap, and the loan cannot exceed any of them.
1. The income multiple. Article 3.4: “Expatriates: up to 7 years annual income” (nationals get eight). This is the number brokers quote first because it is the biggest.
2. The debt burden ratio. Article 3.1 points back to the personal-loan regulation, Circular 29/2011, Article 7: deductions for all loans together, “including, but not necessarily restricted to, car and private housing loans, overdraft facilities, and credit cards facilities, must not exceed 50% fifty percent of his gross salary, and any regular income from a defined and specific source at any time”. The mortgage instalment has to fit inside whatever half of the salary is not already spoken for. The regulation also says lenders should “not automatically apply the maximum DBR” and should take household expenditure into account, which is why two banks hand the same borrower two different letters.
3. The stress test. The same Article 3.1: lenders “are required to stress test the loan at (2 to 4) percentage points above the current rate of interest on the loan”, and where there is an introductory rate, at “the rate that will apply on cessation of the introductory rate”. The instalment that has to fit inside the 50% is not the instalment on the offer, it is a heavier, hypothetical one.
4. Loan-to-value and term. For an expatriate’s first home under AED 5 million, “maximum 80% of the value of the property”; 70% above that, 60% for a second or investment property, 50% for anything off-plan. “The maximum tenor of the mortgage loan is 25 years.” The regulation leaves the age at final repayment to each bank, and Emirates NBD’s page sets its own: “not older than 65 years old if salaried, or 70 years old if self-employed, when the loan matures”.
The letter does not show the four ceilings. It shows the lowest one, and it is usually not the one from the sales call.
The worked example: AED 25,000 a month, one car loan
Expatriate, salaried, gross AED 25,000 a month, a car loan costing AED 1,800 a month, no other borrowing. The rate is an assumption for the arithmetic, not a quote: 4.5% on a 25-year reducing-balance loan, stress-tested 2 points up at 6.5%. Every other number below comes from the two regulations above.
| Ceiling | The rule | The number |
|---|---|---|
| Income multiple | 7 x AED 300,000 annual income | AED 2,100,000 |
| DBR at the contract rate | 50% of 25,000 = 12,500; minus 1,800 car = 10,700 a month; 25 years at 4.5% | AED 1,925,000 |
| DBR at the stress rate | the same 10,700 a month, 25 years at 6.5% | AED 1,585,000 |
| Same borrower aged 45 | 10,700 a month, 20 years to 65 at 6.5% | AED 1,435,000 |
The pre-approval letter for a 35-year-old reads roughly AED 1,585,000. That is about a quarter below the AED 2.1 million the income multiple promised, and every dirham of the gap is the stress test and the car loan. At 80% LTV it caps the purchase price at about AED 1,980,000. For the 45-year-old with the same salary and the same car, the ten missing years take the loan to AED 1,435,000 and the price ceiling to about AED 1,790,000.
Two of those inputs are movable before applying, and both are cheaper than a bigger deposit. Settling the AED 1,800 car loan adds it back to the monthly room: 12,500 a month at the stress rate lifts the 25-year ceiling to about AED 1,850,000, which is about AED 266,000 of borrowing bought with one settlement. And a card limit is a liability whether or not the card is used; how each bank prices an unused limit is its own policy, so it is worth asking before the statements are submitted, not after.
Why the number in the letter moves before completion
Three things re-open the file. The letter expires, and a purchase that runs past the 60 days is re-underwritten on that day’s salary certificate, that day’s credit report and that day’s rate, which is the input the stress test is built on. The valuation comes in under the price, and the 80% is 80% of the lower figure, so the buyer funds the difference in cash on top of everything already listed in the upfront-costs piece. And the bank statement is read again at final approval; a new instalment appearing in it, a salary paid late, or a bounced cheque in the six months can change the answer the second time.
The mechanics are the same as the credit line at work. The limit is set off documents, it is stressed, and it lapses. The useful habit is to run the four ceilings at home first, with the stress rate and the real years to 65, so the letter confirms a number that was already known rather than announcing a smaller one.