The days of feverish speculation that made Dubai’s property sector one of the most volatile in the world are long gone; today, end-users dominate the market and rely on mortgage borrowing to help fund their purchase.
There are numerous factors for prospective borrowers to consider, ranging from the upfront costs to determining the mortgage duration and whether to go with a variable or fixed interest rate.
#1 The initial expenses
Expats must pay a minimum deposit of 25% of the purchase price for properties sold for less than AED5 million, according to UAE Central Bank rules. In addition to this down payment, you’ll need a 4% transfer fee (less in other emirates) and a 0.25 percent mortgage registration fee calculated on the loan amount in Dubai. In all emirates, you should expect to pay a 2% real estate commission, a valuation fee of AED 2,500 to AED 3,000, and a loan establishment fee of up to 1% of the loan amount.
#2 Obtain pre-approval
Before doing any serious property hunting, prospective buyers should obtain mortgage pre-approval to confirm their budget. When signing a sales agreement, the buyer must provide a check for 10% of the purchase price; if you commit before obtaining financial approval and are later denied bank financing, you will forfeit the deposit.
Given the wide variation in lending policies, fees, and rates between banks, using a professional mortgage broker to advise you on the best option will save you time, money, and a lot of headaches.
Banks typically limit mortgage lending so that repayments do not exceed 25% of the borrower’s monthly income. Lenders will also consider existing debts, such as car loans or credit card debt, when determining how much to lend. However, different banks use different borrowing capacity calculation formulas. Different lending policies between banks can mean a difference of Dh300,000 in your pre-approved mortgage limit for someone earning Dh25,000 per month.
#3 Mortgage tenure
For salaried people up to the age of 65, the maximum loan allowed in the UAE is 25 years (70 for self-employed). A longer term reduces monthly payments while increasing the total interest paid to the bank. We recommend that you choose the longest term possible to maximise your borrowing capacity and, if possible, make additional payments during the loan’s term. Borrowers can typically repay an additional 10% of the remaining principal amount each year without penalty, allowing you to repay faster if desired. Paying an extra 10% per year on a Dh1.2 million loan allows you to pay it off three years sooner and save over Dh75,000 in interest.
#4 Interest rates are expected to rise.
Mortgage interest rates are currently around 2.99 to 5%, but are beginning to rise in response to rate hikes in the United States – the dirham’s dollar peg means UAE interbank rates follow those of the Federal Reserve. The Fed’s recent moves appear to signal the end of nearly a decade of ultra-low interest rates, and we strongly advise borrowers to lock in a fixed rate mortgage. This is usually for two years, and UAE banks currently offer fixed rates ranging from 3.5% to 4.50%, which is slightly higher than the variable rate.
Please keep an eye on the “revision” rate. When the fixed rate period ends, this is the rate you’ll be paying on your mortgage. These are typically linked to three-month, six-month, or 12-month EIBOR plus a bank-determined margin. A mortgage with a low initial interest rate may appear to be a good deal, but these are frequently the most expensive mortgages over the term of the loan.
A borrower’s interest rate and thus monthly repayments will remain unchanged in a fixed rate mortgage, reducing the likelihood of them becoming insolvent, but the revision rate could be much higher, having a significant impact on monthly mortgage payments. Consider the earlier example of an AED1.5 million property purchased with a 25% cash deposit plus 75% of the fees added to the mortgage, resulting in a mortgage of slightly more than AED1.2 million. A 3.5 percent interest rate would result in a monthly repayment of AED6,009, but if rates rose to 5.5 percent, repayments would rise to AED7,392 – a 23% increase.
#5 Rates that are fixed
Some banks provide fixed-term loans for up to five years. The longer the fixed rate, the higher the cost. Five-year fixed rates are currently ranging from 4.75 to 4.99 percent, which is significantly higher than one- and two-year fixed rates but still very reasonable by historical standards and recommended for those seeking peace of mind.
In recent years, switching mortgage providers has become much easier. Some banks used to charge penalties of up to 5%, but this is now capped at AED10,000. If you’re still in the middle of your fixed-rate period, the cost of switching banks may be higher. What is more common is for a borrower’s existing bank to make a concession and offer sufficiently appealing terms for them to stay. The headline rate is unlikely to be obtained because the incumbent bank will factor in the fees avoided by remaining in place, but the terms will be better than what was initially offered – banks offer rates on a case-by-case basis, so negotiation is essential.
Every borrower should be aware of the risks associated with fixed and variable rates, as well as the various revision rates available in the market. You can either contact every bank in the UAE or a good professional independent mortgage broker who can quickly list and compare your options.
Different banks have different policies regarding where they work, whether or not they are self-employed, whether or not they are a UAE resident, and the property used as security. Bank call centre employees have a bad habit of saying yes, yes, yes and then wasting months of your time asking for endless documents, only to say sorry we can’t help in the end.
