How to Get the Best Equity Home Loan Rates in Dubai, UAE Guide

Tue, 22 Dec, 2020

What is an Equity Loan?

Equity home loan, as the name implies, is a financing tool through which a bank allows you to borrow against your existing equity. To make it simple, if you own a property or a certain percentage of it, then a bank sanctions you a loan against that property, which will be put down as collateral.

Equity home loans can be very helpful when you want to borrow money for business and investment, including setting up a business in UAE, settling previous property loans, buying a new property or anything else. 

Thanks to the availability of equity loans and financial services to expats and residents, the amount of financial freedom and convenience is immense. It eases down the burden of owning property through different types of property loans, which include mortgage loans and equity home loans.

There are a lot of banks that offer different sets of benefits for the applicants, so you can always find the best mix of terms to suit your situation. 

Who Can Apply for an Equity Home Loan in UAE? 

The best thing about home equity loans is that it does not have a long list of requirements for people to become eligible for a home. The most basic thing you need to have is a property and a continuous earning so your eligibility can be calculated. One can apply for an equity-based loan to counter different situations. In this section, we will discuss some common ones. 

Home equity loans are ideal when you have bought a property on a mortgage and have an urgent requirement of cash for your business, home improvements, or any other purpose. The lender can use the current property as collateral to reduce the risk, and you can easily secure the much-needed funds to settle your matters. 

Equity loans can also be used to reduce the burden of your existing mortgage loan. A person’s financial situation may change over time and if they have outstanding instalments and loans, they may find themselves struggling to pay their debts. In order to get some support in maintaining previous loans, the borrower can make use of these equity loans which can also help in ensuring long-term financial stability if things are planned well. 

There can be many other such situations where equity home loans can come in use. One common thing that is considered is when you think your current mortgage rate is higher than the market and you want to completely payoff your outstanding mortgage loan this way. In this case, your better option would be to get a mortgage refinance, since your equity home loans generally carry higher interest rates in comparison to mortgage loans. 

Another thing to keep in mind is to always maintain a strong credit history, which is an important factor along with the income and equity for securing a loan. If you expect any irregularity in repayment of your mortgage loan, it is a good idea to apply for an equity loan in time so you can maintain your credit score which is important for a lot of your banking requirements.

Benefits of Securing an Equity Home Loan

Equity home loans are a popular tool as they bring a great amount of benefit for the debtor and a lot of security for the lender. The debtors get the benefit of finding flexible repayment schedules, higher loan amounts, and a lot more to manage their finances conveniently. Here are some of the major advantages of equity home loans. 

Usage of Equity

No matter how bad your current cash flow is, your equity can bail you out of s financial crisis.  A major benefit for applicants is that equity is a major decider, which can make your lending institution ignore your dire financial situation to s great degree since they are secured. So even if you are low on funds, your equity loans are a convenient way to smooth over things for you.

Partial Equity

Even if you have purchased a property through mortgage finance, you can make your efforts count to get yourself another loan. In simpler terms, the property value which you have already repaid in the form of instalments will be held as collateral for the loan.

This way, although you were unable to pay off the previous loan, the amount returned will be very beneficial to you. Financial institutions and credit unions also offer a very flexible and beneficial home equity line of credit once you have secured sizeable equity in any property. 

With Poor Credit

It is always advisable to maintain a good credit history so you can get quick approvals and have more choices when it comes to loans and the interest rates. But a major positive aspect of equity home loans is that even bad credit can be ignored by the lenders, as they can depend on the property value to secure their property investment.

So even when you are unable to maintain good credit, have credit card debt, mortgage debt and other liabilities, you can still be hopeful of securing sizeable loans and credit lines.

Are Mortgage Loans and Equity Home Loans the Same Thing?

Mortgage loans and home equity loans might sound similar, as both are financing tools and involve property. But they are very different; mortgage financing helps you get a home or property, while an equity loan can be acquired once have a property. To understand the difference further, we will briefly discuss mortgage loans in the section below. 

Mortgage Loans

A mortgage loan refers to a loan where a bank or any other lender provides the loan to finance a property for the receiver. The property to be purchased is kept as collateral and you can keep increasing the equity in your home by strictly paying the instalments during your repayment period. 

Unlike equity loans, at the time of mortgage loan application, the borrower does not have any equity in his property, which may be held as collateral.

Equity loans, on the other hand, consider equity that holds a defining significance in this type of loan. In this type of loan, the portion of the property which is paid for and owned by the applicant is the focus. As collateral, equity offers a sense of security to the lender and is the main difference between mortgage financing and equity home loan financing.

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Mortgage Types and Calculation

Mortgage loans come in several forms, mostly differing on rates of the interest only. Let’s get straight into the details about each type and discuss what each variant has to offer. 

Fixed Rates Mortgage Loan

These mortgages follow a fixed interest rate throughout the loan tenure, which means the amount of monthly payments does not change with time and you are aware of the exact amount of instalments that you need to pay every time. The advantage of the fixed interest rate is that you can easily plan for your payments in the long term and are more likely to avoid a situation where you need cash-out refinance. 

Variable Rates Mortgage Loan

As the term suggests, the interest rates here are determined by the EIBOR Rates, which fluctuate regularly. This means that your monthly instalments vary with time. The major drawback to this form of mortgage payment is that you cannot plan ahead for your payments and can be caught unaware. On the up-side, you can get the benefit of a significantly low EIBOR Rate from time to time and save money.

 

Other Mortgage Types

Along with these major types, one can also find other types of mortgage loans in the UAE. There is the Capped Mortgage, which is also variable rate mortgage but with an upper limit for the Mortgage rates. There is also the Discounted Rate Mortgage, which follows a very low interest rate for a certain period of the loan tenure.

Offset Mortgage, another type of mortgage used in UAE, allows debtors the freedom to deposit or take out the amount at will, directly controlling the outstanding loan amount. 

Calculating Mortgage

Mortgage calculation is an expert job and can be difficult for common people. The best thing to do is to make an estimate of repayment schedule and monthly payments by contacting an expert. Before that, you can also do a calculation by yourself using DAMAC’s Mortgage Calculator. This calculator helps you get an estimation of the monthly instalment to be paid, based on the interest rate, loan amount, and loan term. 

 

Applying for Equity Home Loan

It is fairly easy to apply for an equity home loan in UAE. It only requires a few simple steps to start the process, while everything else is handled by the bank. Here is how you can apply for an equity loan in UAE. 

  • Select a bank and provide all the documents that are required. Typically, this includes your proof of identity, proof of earning, and proof of property ownership. 
  • You may be asked for further documents and legal registrations once your application is approved. 
  • Once your documents have been reviewed and your application approved, you now only have to wait for the funds which you can use for a multitude of purposes.

It is important to look at the methods of paying back this loan, since usually people only apply for equity loans in UAE when their financial situation is not very stable. No one wants to lose their home due to non-payment of debts so this loan is a viable option to bail you out. But as you now have a combined loan to pay off, you need to plan your finances in a better way and to use the available funds smartly.

Conclusion

Equity home loans can be very helpful for both expats and residents who are looking to retain a property in the UAE. There are often cases when the user of a mortgage loan has trouble repaying their debts and looking for ways to consolidate debts. These individuals have a few options to choose from, including cash out refinance, but the most suitable choice is equity home loan. 

With equity home loans, you can make good use of the equity you have accumulated over the years by paying instalments on time. You can also acquire a new loan, with flexible terms and eligibility criteria to deal with your troubled financial condition.

All in all, equity home loans provide a great option for property owners since it can be used at any time for any purpose. However, like any other financial solution, they have to be used with proper planning to ensure long-term benefit for the applicants. 

Frequently Asked Questions

What does an equity loan on a property means?

An equity loan is financing provided against a fully or partially owned property. The property that is owned by the applicant is held as collateral for this loan. 

Are equity loans a smart choice for expats and residents in UAE?

Equity loans can be very useful in different situations. They can help you make use of your equity to get funds for a business opportunity, home renovation, or support in paying off mortgage loans. Using equity loans is a good idea in most situations. 

How much equity are you eligible to borrow against your house?

You can get a loan of up to 80% of the property value. It comes with the condition that you must own at least 20% equity in your existing property. 

What is the major difference between home equity loan and mortgage loan?

A mortgage loan is one in which you can get a loan to buy a property, with that property being held as collateral for the security of the lender. A home equity loan, on the other hand, requires the applicant to own a property, or have equity in a property to get the loan, with the equity being used as collateral.

In easier words, a mortgage loan helps you buy a property, while equity loan requires you to have a property to apply for finance. 

Can you pay off your mortgage with home equity loan?

There is no restriction regarding the usage of home equity loans and they can be attained even if you already have acquired a mortgage loan. You can use the home equity loan to pay off your outstanding mortgage amount. However, we recommend  you use the funds from the loan on a revenue-generating asset which can help you in paying back your loans, as both finances come with interest and closing costs. 

What are the closing costs on a home equity loan?

The closing costs can make up about 5-7% of the total loan amount. These costs generally include land department charges, registration and documentation costs, origination fees, mortgage registration fees, processing charges, valuation charges, and some other processing costs. The lenders can waive off a major percentage of closing costs, but governmental charges and registration fees cannot be waived. 

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