Why do banks require a security check when issuing mortgages?
When applying for a mortgage in Dubai, one of the most common requirements from banks is a security cheque. This might seem like an extra step, but it plays a vital role in protecting both the lender and ensuring the borrower is committed to repaying the loan. Here’s why banks require a security cheque when issuing mortgages, and how it impacts the overall process.
Security for the Lender
A security cheque acts as a form of collateral for the bank, ensuring that the borrower is committed to making mortgage payments on time. Since a mortgage is a long-term financial commitment, typically ranging from 15 to 25 years, banks need a guarantee that they won’t face significant financial loss in case the borrower defaults.
The cheque provides the bank with some recourse if the borrower is unable to repay the loan or if there’s a dispute in the future. While the property itself serves as primary collateral, the security cheque adds an extra layer of protection for the bank.
Legal Recourse for Default
In Dubai, issuing a cheque that cannot be honored (bounced cheque) is considered a criminal offense under UAE law. Therefore, a security cheque gives banks a legal recourse in the event of non-payment. If the borrower defaults on their mortgage payments and there’s no way to recover the outstanding amount, the bank can present the security cheque for collection. If it bounces, the bank has the legal right to pursue criminal action against the borrower.
While this step is a last resort, the legal implications of a bounced cheque incentivize borrowers to prioritize timely mortgage payments, reducing the risk of default.
Proof of Financial Responsibility
A security cheque is often used as a way for the bank to assess the borrower’s financial responsibility. By requiring a cheque, the bank ensures that the borrower has sufficient funds and assets to cover future obligations. It also indicates that the borrower has a bank account in good standing, reinforcing their ability to manage monthly mortgage payments.
For the borrower, issuing a security cheque underscores their commitment to fulfilling the mortgage agreement, signaling financial responsibility to the lender.
Safeguarding Against Market Fluctuations
The real estate market in Dubai, while robust, is subject to fluctuations. A security cheque provides the bank with some protection against market volatility. If the value of the property drops or the borrower faces unexpected financial challenges, the cheque serves as a backup safeguard. This reduces the financial risk for the lender, especially in cases where the mortgage value may exceed the property’s current market value during downturns.
Confidence for the Borrower
For borrowers, issuing a security cheque might seem like an additional step, but it can actually work in their favor. It reassures the bank of the borrower’s reliability, making it more likely to secure favorable mortgage terms, such as lower interest rates or more flexible repayment plans.
By providing a security cheque, the borrower can demonstrate their commitment to the mortgage, building a stronger relationship with the bank.
How the Security Cheque Works in Practice
Typically, the security cheque is kept by the bank and is not cashed unless the borrower defaults on payments or violates the terms of the mortgage agreement. The cheque’s amount can vary, but it’s usually issued for the total mortgage value or a portion of it, depending on the lender’s requirements.
In most cases, as long as the borrower continues to meet their mortgage obligations, the cheque will never be used. However, it serves as a strong deterrent against missed payments, providing peace of mind to the lender.
