With so many prime real estate locations in Dubai, it is easy to get carried away with selecting the perfect property to call home. However, before you fall in love with your dream home, consider how you intend paying for it. Although the mortgage market is nowhere as large as that in the UK, there are over 30 lenders in Dubai offering a variety of mortgage packages, so it is worth taking the time to find the best deal for your needs. It is advisable to get approval for your mortgage in principle before you start looking for property; else you might just fall in love with a home that you are in no position to bid for.
The right mortgage deal for you will depend on a variety of factors including the property you wish to buy, the amount of loan you wish to procure, the amount of deposit you will be able to pay and your lifestyle. Different banks and lenders have different lending criteria and each institution uses different guidelines to assess a borrower’s ability to pay back a loan amount. Some of the key factors that lending institutions look at are:
- Other financial commitments you may have at the time of application for the loan including credit card debts and limits – under Central bank laws, no more than 50% of your total income should be committed to paying off your debts including mortgage payments, credit cards, other loans etc.
- Current income and income type (full time, contract etc.)
- The loan amount compared to the value of the property you intend on purchasing
- Lifestyle factors such as number of dependants etc.
- Type of loan requested
- General living expenses
- Current savings and other assets
Some of the terminology you will come across in your mortgage application is explained below; it is important to understand these terms so that you know the terms and conditions of your mortgage. This will help you to decide on the best deal for you and will also help you with future budgeting.
Early Repayment Charge (ERC): This is a penalty imposed by lenders on borrowers who wish to pay back the loan amount before the agreed term of loan payment. ERC varies based on whether the mortgage is a fixed or variable interest rate loan.
Loan-to-Value Ratio (LTV): The LTV is the amount of money borrowed relative to the value of the property. If the LTV is 80%, this means that the borrower will be making a down payment of 20% and has applied for a mortgage loan of 80% of the value of the property.
Equity Release: Equity is nothing but the difference between the value of your property and what you owe on it. As you make payments, the amount you owe on the property begins to decrease and you can build up equity in your property; the same is true if the value of the property rises from the time you purchased it. Many lenders will allow borrowers to use this equity for further borrowing purposes; therefore depending on your financial circumstances, equity in your home can be released to finance other requirements such as buying a car or building up an investment portfolio. Equity release is a great way of getting money out of the property you own.
Re-mortgaging: Re-mortgaging refers to a change in lender during the term of your loan; a borrower might decide to change lenders to avail of more attractive promotion rates or loan options. However it is worth considering the current relationship you have with your lending institution; if you enjoy a good relationship with your lending institution, moving to a new lender will mean having to build up that trust all over again. The benefits of changing lenders may also be minimized once you take into consideration any early repayment charges or processing fees.
Mortgage Repayment Options
There are different payment methods when repaying a mortgage:
Capital and Interest (Repayment Mortgage): This is the most common form of loan repayment; it involves making regular payments of capital and interest over a set term. Monthly mortgage payments contain an element of capital (repaying principal amount) and interest. During the early years of payment, the interest component is usually mush larger, with only a small portion of the payment going towards principal payment. As the mortgage term progresses, the capital portion of payments generally increases with the interest component decreasing. In general, lenders may offer a mortgage term of up to a maximum of 25 years or a maximum age of 70 years for UAE national and self-employed expatriates and 65 years of age for employed expatriates, whichever comes sooner.
Interest-only Payments: This type of loan repayment option is usually offered only for properties that are under construction. During the interest-only term, no capital is repaid and the entire portion of the payment goes towards repayment of interest only. Interest-only repayment options can be offered for a maximum term of 5 years.
Part Repayment and Part Interest-Only Mortgages: As the name suggests, borrowers can opt for a percentage of repayment and interest-only mortgages to suit their needs.
Deposits and Down payments: The minimum deposit you will be required to pay on your home will vary between lenders and will also depend on the type of mortgage you opt for. As a general rule, expatriates who purchase a home for the purpose of living in it will be required to pay a down payment of 25 – 35% of the value of the property. If you are an expatriate investor you will need to come up with a down payment of 40% of the value of the property. Off plan property purchases incur a larger down payment of 50% of the property value and this down payment must come from your own funds.
Loan Protection Insurance (Mortgage Life Insurance): This is generally a mandatory requirement with all lenders in Dubai and it pays the balance of the mortgage on your property in the event of your death. This is particularly useful if you have a spouse and children who intend on living in the property after your death, but are unable to make the regular mortgage payments. Other forms of insurance protection are also available for disability and terminal illness.
Fixed and Variable Rate Mortgages: When you apply for a mortgage, lenders may offer you one or the other type of interest on your mortgage repayment or a combination of the two. Fixed rate mortgages have a fixed interest rate for the term of the mortgage; this rate is determined prior to signing the mortgage offer letter and is generally offered for a period of one, two, three or five years, although some lenders might offer a fixed interest rate for the entire term of the loan. Fixed mortgage rates have several advantages and may be a better option for you for the following reasons:
- You can budget for payments as you know the interest rate and this will not change for the agreed term.
- If you think that mortgage rates are likely to rise and you would like to lock in a fixed rate of interest.
- If you prefer to know in advance how much your monthly payments will amount to.
It is important to understand that once the fixed interest rate term comes to an end, a variable interest rate will apply; this is often referred to as a follow-on rate. Always make sure that you understand what the variable rate will be before you commit to taking the loan.
Variable interest rate mortgages are those in which the interest rate is dependent on market factors and can change at any time during the loan term. Although it is impossible to determine how much your monthly payments will be, variable rate mortgages might be a better option for you if:
- You believe that there is a strong possibility that interest rates will stabilize or reduce over the term of your loan
- You have the financial flexibility to handle an increase in mortgage payments if the interest rates increase
Before signing a loan agreement, it is crucial to understand how fixed and variable interest rates can affect your payments and to choose the one that is most appropriate for your needs.
Many applicants make the mistake of going straight to their banks for mortgage loans; however they might be missing out on better deals that can be obtained by doing a little research. If the thought of dealing with this seems overwhelming to you, there are mortgage brokers who can do the legwork for you and will also help with all the required paperwork and documentation. You can compare deals at Souqalmal.com that show rates from International lenders such as HSBC as well as local banks such as Mashreq and Emirates NBD.