Applying for a mortgage? You should know this

March 23, 2017

Did you know that mortgage activity in Dubai has doubled over the past seven years? According to a report by Reidin / Global Capital Partners, 55% of real estate sales activities now involve a mortgage.1

In fact, the in-house DAMAC Properties mortgage department has also experienced an upturn in activity and has facilitated home financing worth AED 600 million across hundreds of units in the UAE.

With increasing demand for home loans in Dubai, buyers need to be aware of specific terms in order to make a well informed investment decision. To make things easier, we’ve explained a few keywords that you will come across when looking to take out a mortgage:

Pre-approval

A mortgage pre-approval is an essential first step when buying a house. The process is an evaluation to check if you, as the borrower, qualify for a loan. During the pre-qualification, the lender goes through your assets, income and liabilities (basically to see if you will be able to pay the money back). Pre-approval carries weight because of the thorough investigation. The lender will check your credit and verify your financial and employment information. You will also have to show proof of income, and assets, among other formal documentation involving your financial status and life situation.

[Related: Make sure your starter home has investment potential]                   

Debt-to burden-ratio

Mortgage providers commonly check a borrower’s debt-to-burden-ratio (DBR). Your DBR is calculated as the percentage of your total income, which is being allocated towards the payment of all your debt. Lenders use it to determine your ability to take on another debt – ie: the mortgage. According to the UAE Central Bank regulations, the DBR of a borrower shouldn’t exceed more than 50% of their monthly income.2

Furthermore, since the establishment of the Al Etihad Credit Bureau (AECB), lenders can have access to credit reports of borrowers. This way they can take decisions on loan applications by accessing the credit history of a customer.3

Flat or reducing rate

Lenders will commonly quote borrowers a flat or reducing rate. It is vital you understand the difference before applying. A flat rate is calculated on the principal amount with equal instalments payable across the loan duration. On the other hand, a reducing rate interest is charged on the outstanding balance.

When applying for a loan, find out which rate you are being quoted and if it’s a good investment decision before signing the dotted line.

Fixed rate or variable rate

When taking out a mortgage, be sure to weigh the options of financing, which are based on fixed or variable-rates.

Simply put, banks determine the rate of interest from the EIBOR (Emirates Interbank Offered Rate) stipulated by the UAE Central Bank. It is the interest rate charged on the funds borrowed by one bank from another.

A fixed-rate mortgage is based on a decided rate of interest, which remains constant over a number of years. This type of loan protects the borrower from sudden increases in monthly mortgage payments when EIBOR rates increase and, similarly, will not go down should it  decrease.

For variable-rate mortgages, the interest differs over time based on market changes. If your lender is charging you a variable rate, chances are that your repayment amounts will vary as per the EIBOR. In this scenario monthly installments are revised on a regular basis and monthly installments could increase or decrease, as a result.

While applying for a home loan, make sure you are familiar with all the basic terminology. The DAMAC Properties mortgage department is available to provide assistance to customers, allowing them to make a well informed investment decision.

Sources: 1; Constructionweekonline, 2; Gulf News, 3; Arabian Business. 

For more information about DAMAC's various investment options, please register your details in the form, call +971 4 301 9920 or chat with one of our property consultants.

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