Most people in the UAE prefer to finance their property investments by taking a mortgage. The housing prices have dropped in UAE due to the decline in oil prices, US dollar getting stronger and also due to the drop in demand for properties that are above AED 5 million.
Mortgage in the UAE
In the UAE, Mortgage is offered over land and buildings, leasehold interest on real property and building constructed on leased land. Mortgage is a contract where a creditor acquires the right to be satisfied by the proceeds of the sale of the mortgaged property to unsecured creditors and other secured creditors. Mortgagor must be owner of the mortgaged property and it is not essential for the mortgagor to be the principal obligor of the debt that is secured by mortgage, the mortgagor can be the guarantor of debt.
Getting a mortgage helps you invest in a house, where the value appreciates over the years. The loan to value ratio which came into effect in the year 2013 is as follows:
|Particulars||Non-UAE National||The UAE National|
|LTV Ratio for the first property that is valued at less than AED5 million||75%||80%|
|LTV Ratio for the first property that is valued at more than AED5 million||First property - 65% Second property – 60%||First property - 70% Second property – 65%|
|Mortgage restriction for off plan property||50%||50%|
|Maximum age at the time of the last instalment of the loan||65 years||70 years|
|Total repayments will be restricted to||Annual income earned in 7 years||Annual income earned in 8 years|
The maximum loan repayment tenure offered is 25 years. The EMIs cannot exceed 50% of the borrower’s monthly income. The processing fee is also capped at 1% of the loan amount, the minimum is set at AED500 and the maximum is set at AED2,500. The repayments of mortgage is to be made from borrower’s salary and not through verifiable business or rental income or use of end of service benefit. The principal and interest payments are to be made on a reducing balance basis and the repayments are to be at a frequency not less than quarterly. The deferred principal repayment will apply to investment loans and the non-repayment of principal is not permitted for longer than 5 years.
Mortgage interest rates
There are two types of mortgages when it comes to payment rates. They are fixed rate mortgages and variable rate mortgages.
- Fixed rate mortgages:
Fixed rate mortgages have a fixed interest rate for the whole term of the mortgage. The rate is fixed before signing the mortgage offer letter and the rate is offered for 1-5 years after which the rate will be revised. Some lenders may offer fixed interest rate for the entire term of the loan. This will help you set a budget as the mortgage rates won’t change. Locking in the rates will benefit you as the rates may rise in the future.
- Variable rate mortgages:
Here the interest rate are based on the market factors. The rates fluctuate throughout the term of the loan. This works out if the interest rates are decreasing. You need to have financial flexibility to handle the changing mortgage rates as the rates might fall at one point and might spike up the other. You will not be able to budget your finances well when you have taken a variable rate mortgage.
Property Mortgage Rates
Mortgage rates have been stabilising in the UAE. The current mortgage rates range from 3% to 4%. Various introductory offer rates start at 2.45%. However the low introductory rates are offered for a year which is great to get you started. Meanwhile, you must start preparing for after the low rate lapses.
Mortgage rates move from flat to variable rate after the fixed rate has ended. The variable rate will change with the changing market. The variable rates are linked to Emirates Interbank Offered Rate (EIBOR). The UAE Central Bank sets the EIBOR rate. The rate is used by the lender or borrower to set financial transactions in the UAE.
The most common types of deals offered are 2 year fixed rate that start at around 4.99%. You will also get a 5 year fixed rate that starts at 4.99%.
Mortgage rates for Expats
Most mortgages issued in the UAE are to expats as the country is heavily dependent on expat population. The banks have no control on the factors that affect the wealth of an individual. The wealth of an individual is influenced by oil prices, strength of AED and USD, and the employer. The risk that the lender takes when offering mortgage to an expat as there is a good chance the expat will return to his or her home country and default on the mortgage payment.
The government has taken measures to check for the defaults. Al Etihad Credit Bureau will not provide credit reports to banks. The Credit Bureau will have all the credit details of the individual applying for the mortgage. The banks can check it and based on the credit report lend money to those having a good credit score.
The term offered for mortgage for expats is lower than that offered to the UAE National. The rates will vary based on the expats income, age, etc.
How to get the best mortgage deal in the UAE?
You can get the best mortgage deal in the UAE by:
- If you want to buy a property and are planning on taking mortgage for the same, check for the mortgage first and compare the rates offered by various lenders.
- Take your time to find the right deal.
- When you are aware of how much you can borrow, you can narrow down the properties and then go look around for a property.
- You will also get a rough idea of how much you will have to pay each month and you can plan your finances better.
- When you shop around for the mortgage, you can use the deal you got from one lender to bargain for a better deal with the other. The lenders may not reduce the rates, they may reduce the processing fee or offer a higher loan to value.
- You can get mortgages on villas easily than on apartments. The lenders consider apartments to be risky due to the greater supply.
The mortgage can be paid off early for 1% early settlement charge. If you want to borrow more money, you can take a top-up loan on your mortgage. When checking for the mortgage affordability, you must take into consideration the arrangement fee that will be charged, the valuation fee and also the cost of the compulsory life and household insurance. If you are getting a mortgage broker, you will have to consider his fees as well.
By introducing new regulations and Credit reports, the central bank is trying to promote development, organisation and regulation of mortgage loans in the UAE and ensure that borrowers don’t default their loan repayment.