Top 6 Types of Mortgage Loans in Dubai: What You Need to Know in 2021 (Ultimate Guide)

Thu, 02 Sep, 2021

Buying real estate is a complicated process. This is why, if you are a first time home buyer, the fear of all those unknown variables can make the experience frustrating, stressful, and downright terrifying. There are several decisions you need to make, from deciding where to live, to finding an agent and, most importantly, to choosing the right type of mortgage to finance your purchase — including upfront costs, mortgage duration, and type of interest rate

To assist you in making the best financial decision possible, DAMAC shares this ultimate must-have guide with all of the information you need to learn more about each mortgage type in Dubai and how they may work for you.

At the end of this article, you would have learned:

●       What a mortgage is

●       How mortgages work in Dubai

●       The types of mortgage available in Dubai

●       The benefits and drawbacks of each mortgage type in Dubai

●       The documents you must prepare in order to obtain a mortgage

●       Dubai's mortgage eligibility requirements

●       Available mortgage repayment plans

●       Best practices for making the mortgage application process easier

TABLE OF CONTENTS

What is a Mortgage?

How Home Loans Work in Dubai

Mortgage in Dubai: What to Expect

Types of Mortgage in Dubai

Mortgage by Property Type

On Mortgage Repayment Plans

Mortgage Type in Dubai - FAQ

Best Practices to Adopt: How to Simplify the Mortgage Application Process 

MORTGAGE IN DUBAI

MORTGAGE IN DUBAI

What is a Mortgage?

A mortgage is a term that refers to a loan taken out to finance the purchase of a property (apartment, house, land, or commercial building). Rather than paying the entire purchase price upfront, with a mortgage, you only pay a portion, while your mortgage provider covers the rest.

Most mortgages have a 25-year term, but this can vary depending on the mortgage lender and your credit report. However, regardless of the loan's tenure, the lender retains ownership of the property under mortgage until all payments are made in accordance with a predetermined repayment plan (in Dubai, mortgage payments are usually monthly).

In other words, the value of your home is used as collateral until the loan is paid off. If you do not keep up with payments, your lender can repossess and sell your home to recoup their losses.

How Home Loans Work in Dubai

The application process for a mortgage in Dubai is fairly straightforward. You can arrange a loan directly with a bank or hire a broker to handle the entire process on your behalf; in either case, your home loans must be registered with the Dubai Land Department (DLD).

That said, in most cases, you will be better served by working with reputable mortgage brokers who can provide you with invaluable knowledge and insight into the Dubai property market and guide you towards the best available home loans for your needs.

Mortgage in Dubai: What to Expect

●       Mortgage Duration

The maximum loan term for a mortgage in the UAE is 25 years for salaried people up to the retirement age of 65, or 70 if you are self-employed.

DAMAC recommends that you choose the longest term possible because it will maximise your borrowing capacity. Yes, a longer term will increase the total interest you will have to pay back on the loan, but it will also reduce your monthly payments.

Furthermore, you can always make additional payments (up to 10% of the principal without penalty) during the course of the mortgage if you decide to pay off the loan sooner.

However, before deciding on a home loan term, seek professional advice.

●       Lending Limit

In most cases, the mortgage lending limit in Dubai is set at 25% of your monthly income.

However, when calculating your mortgage limit, mortgage providers will also consider existing debts such as credit card debts and car loans, your income type (contract, full-time, etc.), current savings and other assets, as well as lifestyle factors such as the number of your dependents, and more.

Depending on the results of your credit check, the amount you may qualify for may be less than 25% of your income. Please note that the precise capacity evaluation formula will vary depending on your mortgage provider.

●       Eligibility Criteria

To be eligible for mortgages, UAE nationals, as well as foreign residents, must be at least 21 years old, have a good credit rating, demonstrate a stable income, and be able to complete their mortgage by the legal retirement age. There's a further clause for foreign residents which stipulates that the total amount (principal and interest) cannot be more than the total amount you can expect to earn in seven years.

On average, the minimum salary requirement is AED 7,000 for UAE nationals and AED 10,000 for foreign residents.

Having said that, lenders prefer to make loans to residents because they have more options for recovering their money. As a result, mortgage options for non-resident foreign investors are limited; if you fall under this category, speak with a broker about your options.

●       Principal

This is the total amount of the loan you have been given. For example, if you took out a mortgage of AED 200,000 to purchase a home in Dubai, that is your principal amount. Typically, the principal on your loan will only cover 70-80 percent of the property cost; the remainder is expected to be covered by you, with a deposit.

●       Interests Rates on Home Loans

Mortgage interest rates in Dubai typically range between 2.99% and 5%. The interest rate is expressed as a monthly percentage that is added to each mortgage payment. That said, the total amount you can expect to pay on the principal will be determined by whether you select a fixed or variable interest rate.

If you choose a fixed rate, it is usually for two or five years (but with a higher rate). Following that, a revision rate will be applied. As a result, your rate may rise following the revision. Variable interest rates are just as difficult to calculate because it is impossible to predict where the real estate market will go. This is another area where a broker's advice can help you save money in the long run.

●       Repayment Value

This will be determined by your mortgage provider as per your credit report. In most cases, the repayment amount is no more than 25% of your monthly income. However, if you have no current debt obligations, it can be up to 50% of your monthly income.

●       Upfront Costs

Here is what you need to budget for first before applying for a home loan in Dubai:

●       25% of the purchase price as a down payment on properties less than AED 5M. Properties that exceed this are reviewed on a rolling basis. However, non-residents buying an investment property are likely to be asked to pay up to 40% of the price upfront as a deposit.

●       Valuation fee – ranges from AED 2,500 to AED 3,000

●       4% property transfer fee paid to the Dubai Land Department

●       2% real estate commission (can vary)

Note: Some banks in Dubai allow mortgage applicants to add three-quarters of the total purchase fee to their home loan.

●       Documentation (Paperwork)

The exact paperwork you'll need to prepare will be determined by a few factors, including the financial institution providing the loan and your citizenship and residency status in the UAE.

In general, however, you will be expected to submit:

●       A duplicate of your personal identification documents (passport with valid visa or Emirate ID when applicable)

●       Evidence of residency (DEWA bill, copy of tenancy contract, etc.)

●      Proof of funds/creditworthiness (e.g., bank statements for the past six months, payslips, latest credit card statements, tax return statements, salary certificate). Please keep in mind that the law in Dubai only requires that your debt payments not exceed 50% of your income, so many banks are more accepting of higher debt profiles.

●       Employment documentation

●       MOU Copies (when applicable)

●       Copy of the Title Deed (when applicable)

●       Bank statement for the company (if you are self-employed)

●       Memorandum and articles of association (if you are self-employed)

●       Audited financial statements of the last two years (if you are self-employed)

●       Copy of trade licence

●       Copy of board resolution

●       Business profile on company letterhead

●       The Size of Your Deposit Will Matter - Loan to Value (LTV)

Before you can buy a home, you will need to pay a deposit which goes towards the cost of the property. This is referred to as Loan to Value (LTV), which simply translates to the percentage of your home's value that you own, compared to the percentage value that is collateral for your mortgage.

Why is this important? Most mortgage lenders offer lower interest rates to individuals with larger deposits as their risks will be lower.

LTV (Loan-to-value ratios) for Mortgage in the UAE

According to the UAE Mortgage Law, foreign residents who are first-time home buyers are required to put up at least 20% of the home purchase price as a down payment, for properties worth up to AED 5 million. Properties worth above AED 5 million require a minimum 30% down payment.

Note: For non-residents, most banks in the UAE will only finance up to 35% of the property value.

For both first and future mortgages, UAE nationals would be eligible for a 5% bonus. LTV ratios were capped at 50% for properties under construction (with the other 50%  being funded).

Please keep in mind that the above-mentioned rates are subject to change at any time.

●       Taxes

There is no property tax in Dubai. However, you may be required to pay certain fees.

If you intend to rent out your property, you must pay a 5% surcharge on the average rental value in some areas of Dubai.

You will also be required to pay a monthly municipal tax or housing fee.

●       Mortgage Insurance

This only applies if you can only put up less than 20% of the LTV. In this case, you are responsible for the cost of mortgage insurance, but it protects your lender. In the event that you fail to make mortgage payments, mortgage insurance will pay your mortgage provider a portion of the principal.

However, you are still liable for the entire loan, and you may lose your home in foreclosure if you fall too far behind on your repayments.

MORTGAGE TYPES IN DUBA
Dubai is a haven for those seeking a luxurious lifestyle in a modern, well-developed city. Not only do professionals relocate here to advance their careers, but it can also be an excellent destination for families, with a wide range of activities to suit all interests and ages. 

Recognizing this trend, the UAE mortgage market is now well-established, with local and international lenders offering home loans to both foreign residents, UAE nationals, and non-residents. However, because a home loan is a long-term commitment, it is critical that you understand the pros and cons of each mortgage type in Dubai, as well as the legalities of setting one up, before making a decision 

Financial lenders in Dubai and the UAE provide a variety of mortgage types based on your property and financial needs. The following are the mortgage options available to you:

1.    Fixed Rate Mortgage

A fixed rate mortgage has an interest rate that remains the same for a set period

A fixed rate mortgage, as the name implies, is a home loan in which the interest rate on the principal is predetermined before the loan term begins and remains fixed for a certain period of time. That is, the rate of interest you pay on the amount you've borrowed is fixed for a set period of time. Also, the interest rate is determined at the discretion of your mortgage provider following guidelines set by the Central Bank of the UAE

This type of mortgage is typically for a period of one to five years. When the fixed period expires, your interest rate is reverted to a higher rate (reversion rate), which is usually a fixed rate higher than the Emirates Interbank Offered Rate (EIBOR) rate or your lender's own base rate. This process is repeated until the mortgage is paid off completely. In some cases, however, you may be able to enjoy a fixed interest rate from the beginning to the end of the maximum term (25 years) of your home loan.

Note: Emirates Interbank Offered Rate (EIBOR) is the daily mortgage interest rate published by the Central Bank of the UAE. It is an aggregate of the average interest rates offered across all banks in the UAE over a given period, excluding the two lowest and highest rates. The EIBOR periods are 12 months, 6 months, 3 months, 1 month, 1 week, and overnight.

Pros of a Fixed Rate Mortgage

-       The primary advantage of this type of mortgage is that it makes it easier to budget for loan repayments. Because the interest rate is fixed, you are protected from rate increases for the duration of the fixed period; you won't have to worry about fluctuations. As a result, you can be clear about your budget from the start.

 Cons of a Fixed Rate Mortgage

-          When the fixed period expires, a follow-on rate, also known as the reversion rate, is applied. This is usually higher than the initial interest rate as well as the current EIBOR rate.

-       You also gain nothing from a decrease in the EIBOR rate or your bank's base interest rate because you will be stuck with the rate on your contract. Furthermore, the longer your fixed period, the less competitive your rate will be. Thus, you need to be quite diligent and tactful when opting for this mortgage type.

Fixed rate mortgage: Who is it best for?

Fixed rate mortgages are a good option for anyone who prefers shorter-term mortgages because they will not have to pay the higher reversion rate for an extended period of time once the fixed period expires. It is also suitable for those who prefer predictability.

 

Fixed Rate Mortgage Key Takeaways

 

★        The interest rate on a fixed rate mortgage does not fluctuate with market conditions once it is locked in.

★        When the fixed period expires, the loan's subsequent interest rate is usually higher.

★        With a fixed rate mortgage, repayments are simple to budget for.

 

  Pro Tip

Seek expert advice from a mortgage broker regarding your specific situation to determine if this is the best loan option for you. A mortgage broker can forecast whether interest rates on home loans are likely to fall soon (saving you a lot of money in the long run), or point you towards a better mortgage option.

2.    Variable Interest Rates (Floating Rate) Mortgage

A variable rate mortgage has an interest rate that does not remain constant over the lifetime of the loan.

In contrast to fixed-rate mortgages, the interest rate on a variable interest rate mortgage can change at any time during the loan's term, depending on market forces in the Dubai property market. 

What this means is that if market conditions are favourable and the EIBOR rate falls, you could end up with a lucrative deal. However, depending on the type of variable interest rate you select, this is not always the case (more on this later).

Variable interest rate mortgages typically have a 25-year term.

Pros of Variable Interest Rate Mortgage

-          This type of mortgage can prove to be a good choice if the interest rate is expected to fall in the future. This means you will end up paying less interest if the EIBOR rate or your bank's base rate reduces.

Cons of Variable Interest Rate Mortgage

-          Because the interest rate is influenced by fluctuations in the property market, this mortgage type can make it difficult to plan and manage a repayment budget.

Variable interest rate mortgage: Who is it best for?

A variable interest rate mortgage is a great choice for you if you have the financial liquidity to deal with fluctuations in the market. It is also an excellent option for non-residents looking to purchase property in Dubai.

Variable Interest Rate Mortgage Key Takeaways

★        A variable rate mortgage is a home loan with a fluid interest rate for the entire term of the loan.

★        The interest rate on this type of loan is determined by market conditions.

★        A variable-rate mortgage allows you to save money on future interest rate reductions.

 

  Pro Tip

Keeping an eye on what is going on in the Dubai property market is a good way to prepare somewhat for repayments.

Types of Variable Interest Rate Mortgages

There are two types of variable rate mortgages:

●       Discounted Rate Mortgage

A discounted rate mortgage has a variable interest rate that is set at a percentage lower than the lender's standard variable rate. 

Discounted rate mortgages are variable mortgages with interest rates that are typically lower than your mortgage provider's base rate or the Emirates Interbank Offered Rate (EIBOR). It is typically an introductory loan offer by banks or financial institutions for first-time home buyers. This loan is similar to a fixed-rate mortgage in that you receive a discount on your lender's base interest rate and pay at that rate for a set period of time. However, your rate may still rise or fall in response to market fluctuations.

For example, if your lender's interest rate is 4% and you receive a 1% discount, your interest rate will be 3% for as long as your lender's rate remains 4%. This is a fantastic way to lower your mortgage payments in the early years.

However, if your lender's base variable rate rises to 5%, your payments will rise as well, because you will now be paying 4%. Similarly, if your lender's rate fell to 3%, your interest rate would drop to 2%.

Discounts typically apply for two to five years, though there are a few “lifetime” discounted rate mortgage deals available. However, once your discounted rate period expires, it will revert to your lender's base variable rate.

Pros of a Discounted Rate Mortgage

-        A discount means that your interest rate will always be lower than your lender's average variable rate for the duration of the deal. In certain situations, this could also mean that your repayments may be lower than alternative types of home loan products.

-          You may be able to pay even lower interest rates if your provider's base variable rate is reduced as a result of changes in the EIBOR rate.

-       When compared to fixed-rate mortgages, discounted rate mortgages have lower early repayment charges, which can help to keep charges to a minimum if you decide to pay more than your monthly repayments.

-          Discounted rate mortgages often have lower arrangement fees than fixed-rate mortgages.

Cons of Discounted Rate Mortgage

-       One of the major disadvantages of a discounted rate loan is that you have no control over your payments. If interest rates begin to rise, your repayments may increase significantly, even if your mortgage rates remain lower than the EIBOR rate, making budgeting for repayments impossible

-       When your discounted rate loan tenure expires, you may find that your repayments skyrocket when you revert to your lender's base rates

-       As with other types of mortgage deals, you may be required to pay an early repayment charge if you pay off all of your mortgage before the loan tenure expires. While many lenders will allow you to make some overpayments, if you decide to switch from your discounted rate mortgage to another product, you may also face a significant penalty.

Discounted rate mortgage: Who is it best for?

A discounted mortgage is for you if you can afford an increase in your monthly mortgage payment but want to get a deal that will save you money in the earlier years.

Discounted Rate Mortgage Key Takeaways:

★        A discounted rate mortgage is a home loan with a variable interest rate but at a discount 

★        The interest rate changes in response to market conditions.

★        Most discounted rate mortgages are introductory home loan offers.

 

  Pro Tip

Compare discounted rate mortgages from various financial institutions in Dubai before settling on one.

●       Capped Mortgage

A capped mortgage has a variable interest rate with a threshold.

 

A capped mortgage is a type of variable rate mortgage with one key distinction: They have an interest rate cap, or ceiling, above which your payments cannot rise. This is done to alleviate the unpredictability associated with other types of variable rate loans. Once the maximum cap is set, if the EIBOR rate rises, your monthly installment may rise, but it will not exceed the predetermined cap.

That said, a capped mortgage is usually only available for a limited time – typically two to five years. They are also the most uncommon of all mortgage types, with only a few capped rate products available in the entire market most of the time.

Pros of a Capped Mortgage

-       Other than fixed rate mortgages, capped mortgages are the only loan type that provides repayment security, allowing you to budget for them.

-          Capped mortgages ensure that your mortgage payment will not exceed a certain level, but because they are a type of variable rate, they also allow you to benefit from lower payments when interest rates fall.

Cons of a Capped Mortgage

-       Because you are paying for the security that the interest cap provides, capped rate mortgages are typically more expensive than the best discounted rate loans available

-          Capped rate mortgages are very difficult to find, as there are usually only a few products available.

-       Interest rates on capped mortgages can still rise, but only to a certain point. You must still ensure that you can withstand any rate increases up to your cap.

-          When the capped rate period expires, your mortgage will revert to your lender's base interest rates for the remainder of the loan term.

-          If you pay off your mortgage early or remortgage to a different lender, you will still be charged an early repayment penalty.

Capped mortgage: Who is it best for?

Anyone who wants to save money when EIBOR rates fall but also wants repayment security.

 

Capped Mortgage Key Takeaways

★        Rates on capped mortgages are typically higher than rates on other variable rate mortgage products.

★        An interest rate cap or ceiling means that the interest you pay will not exceed a certain level, even if your lender raises their base variable rate above the cap.

★        There aren't many capped mortgage products to choose from.

 

  Pro Tip

Speak to a mortgage broker to help you find a capped mortgage deal.

 

3.    Remortgage

A remortgage is the act of obtaining a new loan to replace an existing loan for the same or more money.

A remortgage, also known as refinancing, is a method of replacing or paying off your existing home loan with another. It is usually done to free up equity on a property for other uses.

 A loan renewal can also be considered a remortgage if the second loan amount is the same as what you owe on your current loan.

Pros of a Remortgage

-          Remortgaging into a loan with a lower interest rate or a longer loan term can result in a lower monthly payment.

-       Remortgaging can help you lock in lower EIBOR rates, especially if the first loan is a fixed rate mortgage.

-          A remortgage can help you pay off your loan faster if you remortgage to a loan with better repayment terms.

-       A remortgage can help you consolidate your debts and increase your income. Because mortgages typically have lower interest rates than other types of loans, you can use a remortgage to cash out some of your home equity to pay off higher-interest debts such as a credit card or car loan. Or you could do some renovations, buy a second home, or make some investments.

Cons of a Remortgage

-          A cash-out remortgage will increase the size of your mortgage, resulting in higher monthly repayments and less monthly disposable income.

-       You will have to pay closing fees if you remortgage before the end of your current mortgage term.

-          A remortgage takes time; there will be weeks of back and forth with your lender. You will also need to complete a lengthy remortgage application and provide a large amount of documentation.

-          A new mortgage "stress test" has been implemented in Dubai, making it more difficult to qualify for the same or a different mortgage, even with a lender other than your first loan provider.

Remortgage: Who is it best for?

Anyone who wants to take advantage of lower interest rates, a lower monthly mortgage payment, change their repayment schedule, or cash out equity on their property.

Remortgage Key Takeaways

★        A remortgage can help give you extra income and consolidate your debt

★        The process of getting a remortgage is almost the same as getting your first one.

★        A remortgage can help you pay off your loan faster.

 

  Pro Tip

Using a remortgage to access some of your home's equity is usually much less expensive than taking out other types of loans.

 

4. Offset Mortgage

An offset mortgage allows the borrower to make overpayments from a linked bank account.

An offset mortgage, also known as a flexible offset mortgage or flexible mortgage, is a type of mortgage in which your savings account funds are linked to your mortgage repayments. As a result, any savings you have can be used to make temporary overpayments on your debt.

You will still have access to your savings and will be able to spend them if necessary. This is not the case when you make conventional overpayments on your mortgage because the money goes directly to your lender and is never returned to you.

Pros of an Offset Mortgage

-       An offset mortgage allows you to realise a greater interest-expense-reduction on your mortgage than the amount of interest income lost when your money is simply sitting in a bank account. Since mortgage payments provide you with equity that is significantly greater than the interest rates offered by banks on savings accounts

-          An offset mortgage can help you save money by lowering the total interest you pay on your mortgage. Over a full mortgage term of 25 years, an offset mortgage could save you thousands in interest payments.

-          An offset mortgage can help you pay off your home loan within a shorter period of time because each monthly payment contains a larger proportion of principal repayment than interest payment.

-          Finally, because you can see how the balance in your savings account is being used to reduce the cost of your mortgage, it can be an incentive for you to save more money.

Cons of an Offset Mortgage

-       Offset mortgages typically have higher interest rates than conventional mortgage plans, but with the right amount of savings, you should be able to save a significant amount of money.

-          The interest rate applied to an offset mortgage is a variable rate, so there is a risk that the rate will increase over time.

-       To keep an offset mortgage active, your lender may charge an annual fee. This means you'll have to weigh the possibility of lower interest rates over the life of your mortgage against the risk of incurring higher fees for extra charges attached to the loan.

Offset Mortgage: Who is it best for?

Anyone with extra disposable income who wants to pay off their mortgage in a shorter period of time.

Offset Mortgage Key Takeaways

★        With an offset mortgage, you can make more principal payments on your loan, lowering your interest payments. 

★        Your saving account is linked to your mortgage repayments 

★        Even though your bank account is linked to your repayments, you will still be able to draw on your funds.

 

  Pro Tip

If you opt for this type of mortgage, save more!

5. Investment Mortgage

An investment mortgage is used to buy an investment property.

An investment mortgage, as the name suggests, is a loan used to buy a property for investment purposes.

The goal is typically to generate a stream of income by renting out the property to tenants or to buy a home to improve or update and then resell for a profit. In either case, if you are able to obtain a loan for this purpose and are prudent in your investment, real estate investment in Dubai can be a lucrative source of income.

Note: An investment property, in this case, is typically a multi-unit building with two to four units or a single-family home. Condominiums and apartment buildings with five or more units are considered commercial real estate and are subject to different rules.

Pros of an Investment Mortgage

-       An investment property can earn you a profit. These profits can then be used to pay off the principal and interest on your loan. This way, you can maximize your mortgage returns because, unlike other types of mortgages, you can immediately leverage equity on your property.

Cons of an Investment Mortgage

-       Investment loans are typically subject to stricter underwriting guidelines than commercial or residential mortgages.

-       There are fewer lenders who offer investment mortgages because the risk of default is higher than lending money for a primary residence you intend to call home

Investment Mortgage: Who is it best for?

Anyone who wants to build wealth by flipping fixer-uppers or purchasing rentals.

 

Investment Mortgage Key Takeaways

★        An investment mortgage is used to pay for properties solely for the purpose of earning rental income or profit. 

★        Investment mortgages are subject to stricter guidelines than conventional mortgages.

 

  Pro Tip

Improve your credit score before applying for this type of mortgage.

 

6. Non-Resident Mortgage

A non-resident mortgage is specific to non-residents of a city or country.

A non-resident mortgage is a lending agreement made available to individuals who are not tax residents of a particular country or city to buy property for sale in Dubailand.

Because Dubai is tax free for the most part, tax is not used to determine eligibility for this type of loan. Instead, a non-resident mortgage is available to most individuals who are:

●       Citizens of a country on the approved list of a financial institution.

●       Self-employed or salaried earners with a monthly income of at least AED 20,000 after tax deduction.

●       Between the ages of 21 and 70. Some banks, however, have age restrictions.

 Pros of a Non-Resident Mortgage

-          Foreign investors can use non-resident mortgages to free up working capital.

Cons of a Non-Resident Mortgage

-       There are a limited number of banks that offer non-resident mortgages in Dubai.

-          Most financial institutions in Dubai will only finance up to 50% of the property value for foreign investors.

-          This type of loan often comes with a shorter loan tenure and higher monthly payments.

Non-resident mortgage: Who is it best for?

Non-resident mortgages are ideal for foreign investors who are non-residents of the UAE and want to invest in real estate in Dubai.

Non-Resident Mortgage Key Takeaways

★        A non-resident mortgage is designed for foreign investors looking to buy property in the UAE.

★        Non-resident mortgages have higher repayment and shorter loan terms.

 

  Pro Tip

Seek the help of a mortgage broker in Dubai when taking on a non-resident mortgage.

MORTGAGE BY PROPERTY TYPE

MORTGAGE BY PROPERTY TYPE

Another way of looking at mortgages is by classifying them by property type.

●      Residential Mortgage

A residential mortgage is a large long-term loan obtained by an individual in order to purchase a home in which to live.

A residential mortgage is a term used to describe a home loan obtained to purchase a house or other type of residential property to live in.

In other words, you must use the home as your primary residence and not rent it out to tenants or use it for commercial purposes. This loan is secured by a lien on the property and must be repaid over a set period of time.

You can choose between a variable rate and a fixed rate mortgage for your residential loan, depending on what is best for your circumstances.

Pros of a Residential Mortgage

-          At the end of your loan term, you will have complete ownership of your home.

-          You can re-mortgage a residential home loan, and have more access to finance for other endeavours such as starting a business.

-          A typical residential mortgage has a repayment term of about 25 years, which means smaller monthly repayments.

-          A residential property can increase in value, thereby increasing the overall value of your investment at the end of your loan tenure.

Cons of a Residential Mortgage

-          Increased debt burden

-          If your financial circumstances change and you fall too far behind on your mortgage payments, you may lose your home 

Residential mortgage: Who is it best for?

Residential mortgages are best for anyone looking to buy a home to live in

Residential Mortgage Key Takeaways

★        A residential mortgage is used to finance a home to live in. 

★        A residential mortgage has a longer loan tenure. 

★        A residential mortgage can be re-mortgaged.

 

  Pro Tip

Get pre-approved for a loan before applying for a residential mortgage.

 

●      Commercial Mortgage

A commercial mortgage is used by business owners to secure a property for their operations.

A commercial mortgage is a loan or mortgage that is secured by property that is not your primary residence. They are designed specifically for business owners and are intended to assist you in purchasing a property for your company.

Commercial mortgages are similar to residential mortgages in that a lien is placed on the business property until the loan is completely paid off.

They are a step up from commercial loans, which are not secured by real estate or assets. Nonetheless, the commercial mortgage market has a smaller market share than residential mortgages, despite the fact that its overall value is statistically higher 

Pros of a Commercial Mortgage

-       Commercial mortgages are typically offered at lower interest rates than business loans. This is because the property you buy will be used as collateral to secure the loan.

-          The interest on a commercial mortgage is usually tax deductible (when applicable).

-          Your commercial property, like your home, can appreciate in value, and you could be sitting on a nest egg.

Cons of a Commercial Mortgage

-          Lenders may require substantial deposits, so you may have to take a significant amount of money out of the business which might negatively impact your operating capital.

-          Because a commercial mortgage is secured by the business property, you may be putting the company at risk if something goes wrong.

Commercial mortgage: Who is it best for?

Commercial mortgages are ideal for business owners who want to finance the purchase of a property for their business.

Commercial Mortgage Key Takeaway:

★        A commercial mortgage is used to secure real estate for a company. 

★        Commercial mortgages require higher LTVs than residential mortgages. 

★        Commercial mortgages are tax deductible.

 

  Pro Tips

1. Only choose a commercial mortgage if it can extend your business finance in four distinct ways:

●       Help secure land development ventures

●       Buy a business premises

●       Help build an owner-occupied business

●       Expand its buy-to-let portfolio

2. Before obtaining a commercial loan, ensure that your business will be able to handle loan payments even if times are difficult.

 

●      Land/Construction Mortgage

A land/construction loan is a short-term loan that is used to finance the purchase of a land and the cost of construction.

 

 A construction loan is a short-term loan for the purchase of real estate. You can use this type of loan to renovate an existing structure, buy land, or start  new construction projects in Dubai.

A construction mortgage is similar to a line of credit, in that you only receive the amount you need (in the form of advances) to complete each portion of the project.

Pros of a Land/Construction Mortgage

-          Access to funds to help finance the construction of your ideal property 

-          Most construction loans are interest-only, which can be extremely beneficial on the financial front.

-          The interest rate on a land or construction loan is usually fixed for the life of the loan.

Cons of a Land/Construction Mortgage

-          Land or construction loans are typically for a maximum of 5 years but are typically given out for a year.

-       Closing a construction loan is a time-consuming process. To pay off the loan, you'd need to arrange for an inspection and appraisal of the finished structure, as well as re-mortgage into a loan with a longer repayment schedule 

-       The design phase of the home building contract is not covered by a land or construction loan 

Land/construction mortgage: Who is it best for?

Anyone looking to personalise their home.

Land/Construction Mortgage Key Takeaways:

★        Construction loans are short-term loans for buying land and building on it. 

★        Construction loans are similar to lines of credit in that they expire once the project is completed 

★        Unlike other types of mortgages, where the loan proceeds are paid directly to you, payments on a land or construction mortgage are made directly to the contractors performing the work once they meet project milestones.

 

  Pro Tip

To expedite the application process, prepare the following items before applying for a land or construction loan:

●       A contract between you and a reputable builder.

●       A construction schedule.

●       Building layouts.

●       A realistic budget.

 

ON MORTGAGE REPAYMENT PLANS


Mortgage payments are something you will have to deal with after obtaining a loan to purchase a home. However, there are various repayment options available, and it is best to become acquainted with them as they can help inform your choice of a mortgage. 

There are two types of mortgage repayment plans: interest-and-capital plans and interest-only plans.

●      Interest and Capital Repayments

This is the most common type of loan repayment plan; it entails making regular interest and capital payments over a fixed period, usually monthly.

 

The interest portion of this type of plan is typically much larger during the early years of payment, with only a small fraction of the payment going towards covering the cost of the principal payment. However, the farther along you go into the mortgage term, the capital portion of payments generally rises while the interest component falls.

Financial institutions in Dubai typically offer a maximum mortgage term of up to 25 years for both UAE nationals and foreign residents for this type of repayment plan.

●      Interest-Only Repayments

Interest-only repayment plans are typically attached to loans used to fund off-the-plan projects such as the purchase of land or the construction of a new building.

With this repayment plan, you only have to pay interest on the loan's principal. That is, no capital is repaid during the interest-only period, and the entire payment is used to service the interest on the loan.

Financial institutions in Dubai generally offer interest-only repayment plans for a maximum term of 5 years

At the end of the term, you will be required to repay the principal amount in a  lump sum, or have the loan re-mortgaged into a loan option with a longer repayment schedule.

 

  Pro Tip on Repayments

Most financial institutions have online mortgage calculators that can assist you in estimating the repayment value for each type of mortgage based on the EIBOR rate. All you need to do is enter your variables.

 

Mortgage Types in Dubai - FAQs

Is it Difficult to Get a Mortgage in Dubai?

No, it isn't. Obtaining a mortgage in Dubai is a relatively simple process for non-resident foreign investors, foreign residents, and UAE nationals, as long as you submit the necessary paperwork and have an acceptable credit score.

How Much of a Down Payment Do You Need to Buy a House in Dubai?

If you are purchasing a property in Dubai with a mortgage, the amount of the minimum cash down payment is determined by the purchase price of the property and your residency status.

However, the UAE Mortgage Cap law requires UAE nationals to have a down payment of 15% plus associated purchase costs, which increases to 30% if your property is worth more than AED 5 million and 40% if you are purchasing your third or second property.

Foreign residents must put down at least 20% of the property's value in cash.

Please keep in mind that the stated deposits only apply to first-time mortgages. If you already have a mortgaged property, the minimum down payment required increases to 35% for UAE nationals and 40% for foreigners.

What Are the Mortgage Rates in Dubai?

This is largely determined by the financial institution that is making the loan. However, mortgage rates in Dubai typically begin at 3.99% for five years, 3.89% for three years, and 2.75% for one year.

These rates, however, are subject to change at any time and may be higher or lower at the time of your mortgage application/approval.

What are the Major Dubai Banks That Offer Mortgages?

All of Dubai's major banks offer mortgage products, with different options for UAE nationals, foreign residents, and non-resident foreign investors. However, some banks have a broader range of home loan options than others.

That said, it is best to read the fine print on the products being offered because you will be bound by fairly strict terms and conditions once you put pen to paper.

How Can I Get a Mortgage in Dubai as a Non-Resident Foreigner?

The options available to you as a non-resident foreigner for obtaining a mortgage in Dubai will vary depending on the bank. It will also be determined by the value of the property you wish to purchase as well as your financial capacity.

It is worthwhile to consult with a broker to determine what deals are available at the time of your application.

What are the Legal Requirements for Obtaining a Mortgage in Dubai?

●       You must be a resident, UAE national, or a foreign investor:

●       Between the ages of 21 and 70;

●       And have a minimum monthly income of AED 25K (self-employed) or AED 15K (salaried).

Please keep in mind that the minimum salary requirement may be higher or lower depending on the financial institution's policies as well as your residency and citizenship status.

Some banks may also have additional eligibility requirements, such as a minimum number of years of employment at the current job or a list of approved employers.

How Long Does it Take to Get a Mortgage Approved in Dubai?

On average, it takes approximately 10 working days (2 weeks) to obtain the final home loan offer, including the time it takes to get pre-approved secure for the mortgage application for salaried individuals.

Self-employed individuals and non-resident foreigners may face a longer approval wait time.

What are the Hidden Costs to Consider When Getting a Mortgage in Dubai?

You can expect to pay application fees, valuation fees, documentation and processing fees, loan transfer fees, and other fees when getting a mortgage in Dubai. This, of course, does not include your loan deposit fees.

How Long is a Mortgage Tenure in Dubai?

Mortgages in the UAE are available with variable or fixed interest rates. Fixed terms are typically five years long, but they can be as short as one year. Variable-rate loan duration is typically set for a longer period of time, up to a maximum of 25 years.

 

 

Best Practices to Adopt: How to Simplify the Mortgage Application Process

Best Practices to Adopt How to Simplify the Mortgage Application Process

In most cases, the most difficult part of buying a home is obtaining a mortgage; unfortunately, most homebuyers are usually unprepared for the mortgage process.

Fortunately, there are a few things you can do to avoid costly mistakes and make the mortgage process go more smoothly.

First off, define what your attitude to debt is; this will assist you in determining the type of mortgage to apply for.  For example, if you are debt averse, a fixed rate mortgage might be the best option for you because you can plan and budget for repayments.

Other factors to consider when determining the best type of home loan for your situation include your lifestyle, the amount of down payment you have saved, and the loan amount required to fund your purchase.

Once that is out of the way, use the following as a general guide to get the most out of your mortgage:

●      For Remortgages

If you already have a mortgage, switching to a new one may allow you to consolidate your debt at a lower interest rate or get a better deal on your monthly payments.

 It may be worthwhile to switch from a fixed rate mortgage to a variable mortgage to take advantage of better rates, or vice versa for security. However, you will have to pay a fee for switching, so make sure that what you will save outweighs whatever upfront cost you will incur on the re-mortgage.

●      For Moving Homes

Your options are straightforward. Sell your home, pay off your existing mortgage, and get a new one. Alternatively, you can transfer your existing mortgage to the new property, a process known as 'porting.'

Porting is similar to re-mortgaging with your current lender, but without the additional fee, so it is a great way to move house without spending extra money. However, if you choose to pay off your existing loan before it expires, you may be subject to penalties.

●      For the First Time Buyer

As a first-time property buyer, this will most likely be your largest financial investment to date. So, before applying for a mortgage:

1.     Reduce Your Debt

When applying for a mortgage, having fewer liabilities increases your chances of success.

To determine your creditworthiness, financial institutions look at your outstanding credit accounts. As a result, the success of your home loan application will be heavily influenced by recurring debts such as credit card payments.

Paying off these debts on time each month is a good way to demonstrate that you can be trusted with a loan to a potential loan provider and improve your credit score.

2.     Make Sure Your Credit Score Is High or Adequate

Your credit score will determine how much mortgage you are eligible for and whether or not you will get loan approval. Lenders use your credit score to determine how you use credit and pay your bills. A higher score indicates that you are financially responsible.

Note:  The AI Etihad Credit Bureau does not provide specifics on how they calculate your score, but the following is a rough outline of how credit scores are determined:

●       Credit history length (15%)

●       Credit mix (15%)

●       All debt owed (25%)

●       Brand-new credit line (15%)

●       Payment history (30%)

3.     Prepare Your Paperwork

With mortgages, there's nothing like being over prepared. Put together the documents outlined here to get ahead of your mortgage lender and reduce your wait time.

In some instances, a mortgage provider might want to see documentation of your investment and retirement accounts, so prepare these as well.

4.     Build Your Deposit

Financial institutions favour individuals with larger down-payment deposits by giving them lower interest rates. As a result, a smaller deposit will only result in you spending more money in the long run. So, if you don't have a 20% down payment, consider selling some other assets, such as stocks, to increase the size of your deposit.

Discover the best mortgage deals in Dubai for you.

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