All you need to know as a first-time mortgager in the UAE
The decision to get a mortgage is not one people take lightly – and rightly so. Mortgages are likely to be the biggest loans, or investments, that you will make in your lifetime. Additionally, whether you are already on the property ladder, or it is your first venture into being a property owner, the potential to make – and to lose – large amounts of money is very real. For expats living in the UAE, the possibility of defaulting on payments and the legalities involved can make people even more hesitant.
Despite that, at compareit4me.com. we are seeing huge surges in the numbers of people visiting the site to compare their mortgage options – especially among middle-income earners – those bringing in between Dh8,000 to Dh20,000.
When compared against the average number of enquiries of the previous 22 months, enquiries from people earning between Dh8,000 and AED11,999 tripled in March and April. Similarly, the Dh12,000 to Dh14,999 bracket saw growth of 240 per cent in March and 260 per cent in April, while the Dh15,000 to Dh19,999 bracket showed an increase of 96 per cent in March and 150 per cent in April.
This is probably due to a variety of economic and social reasons. Economically speaking, two of the main changes encouraging the mortgage market are the recent drop in house prices and the new trend of building affordable housing developments.
Socially, there has been a discernible shift in people’s attitude to finances and their confidence in shopping around for the best deal, rather than simply going directly to the bank their salary goes into. However, this independent approach means mortgage buyers need to be well informed in exactly what they are shopping for and how to read between the small print and the numbers. Here are some of the most important things to remember when shopping for a mortgage:
When taking out a mortgage, you need to be able to pay a certain amount of the property price up front (25 per cent for UAE expat residents, 20 per cent for nationals) – this is known as a loan-to-value ratio (LTV). The amount you pay back each month will vary from bank to bank, depending on the interest rates they offer and the amount of time you want to pay it back over (normally a maximum of 25 years here in Dubai). Different mortgage lenders will have their own stipulations – a certain salary bracket (the minimum salary requirement is usually as low as Dh10,000 per month), some require salary transfer to that bank, a certain amount of loan repayments in the bank, a maximum amount they will lend (for example, one might offer a maximum of seven or eight times your annual income, with a maximum amount of Dh20 million).
Ask about hidden costs
As well as interest on the loan amount, most mortgages will also have fees (paid at the opening and the closing of the mortgage) and may have other charges, for example if you sell the property before the end of the mortgage period. Additionally, some will have penalties, for example an Early Repayment Charge (ERC) if you repay the mortgage sooner than the agreement. Make sure you know about all of the fees, charges and potential penalties applicable to your loan.
Don’t stretch yourself too thin
As with all loans and finance commitments, be careful you don’t sign so much of your expendable income away that you prevent yourself from being able to achieve short-term finance goals. Savings plans, holidays and day-to-day living are all equally important, so don’t be too quick to diminish their importance in your monthly budgeting plans.
Lower isn’t always better
Most mortgages come with an option of a flat rate of interest (approximately 3 to 5 per cent), or a reducing rate (approximately 5 to 8 per cent). Interest rates can be deceiving. While a flat rate of 4 per cent might sound to you like it’s saving you money, in fact a reducing rate of 6 per cent could actually mean you end up paying less money over the same amount of time. Make sure you have had a proper breakdown from your mortgage lender of how each year of repayments will look over the course of the loan period.
Protect your payments
The biggest fear holding people back from committing to a mortgage is the worry about what will happen if their job situation changes. “Will I still be able to make the payments? What will happen if I can’t?” Here in the UAE, mortgage insurance is mandatory with most mortgage lenders having agreements in place with a preferred insurance provider. If you have the option to source your own insurance, you may find a better deal than the ‘group policy’ recommended to you by the bank, which doesn’t take into account your individual health, wealth or situation. So this insurance plan should definitely be a factor you consider when comparing mortgages. Either way, there are a good range of mortgage insurance options available to cover for the eventuality of job loss, financial issues, critical illness and even death, meaning you can take out a mortgage safe in the knowledge that you, your family and your mortgage payments are protected, whatever the future may throw at you.
Jon Richards is the chief executive of compareit4me.com.
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