Understanding mortgage options: a comprehensive guide for home buyers
Mortgage Options in Dubai: A Home Buyer’s Guide
Discover mortgage types in Dubai, from fixed-rate to Islamic options, and find the right one for your home purchase.
Understanding the mortgage options is the first step towards owning a home in Dubai. Dubai's real estate market offers various mortgage options with its own set of benefits and considerations. In this blog, we will break down the different types of mortgages available in Dubai and explain the repayment terms. So, let's explore and better understand mortgages in Dubai.
Types of Mortgages in Dubai
Below are some of the most common types of mortgages in Dubai.
Fixed-Rate Mortgage
A fixed-rate mortgage comes with a predetermined interest rate that remains unchanged for a specific period, usually less than five years. This type of mortgage offers the advantage of knowing exactly how much you will pay each month, which makes it easier to plan your budget. However, you could end up paying more if market interest rates drop below your fixed rate.
Variable Rate Mortgage
Unlike fixed-rate mortgages, a variable mortgage's interest rate can change over the loan term. The interest rate fluctuates based on the Emirates Interbank Offered Rate (EIBOR). A variable-rate mortgage can be beneficial if you have enough financial flexibility to handle increases in repayments. If not, the variable nature of the interest rate can make budgeting more challenging.
Variable rate mortgages have two subtypes.
Discounted Rate Mortgage
A discounted rate mortgage offers an interest rate set at a percentage less than the lender's base rate. So, it is an attractive option for first-time property buyers. As the discounted rate is usually only applicable for a specific period (2-5 years), you could face higher repayments when this period ends.
Capped Mortgage
A capped mortgage is a type of variable rate mortgage where the interest rate can fluctuate but not beyond a predetermined cap. It offers protection against rising interest rates, but capped mortgages are harder to find and may come with higher costs due to the added security of the cap.
Remortgage
Remortgaging means getting a new loan to replace an existing one. These loans are acquired to get lower interest rates, better repayment terms, or to release equity from your property. But remember, remortgaging could make your mortgage last longer and may incur early repayment charges.
Offset Mortgage
An offset mortgage lets you link your loan account with one or more deposit accounts. This mortgage type can help you save on interest payments and pay your mortgage faster. Offset mortgages have higher interest rates and annual fees than conventional mortgages.
Investment Mortgage
Investment mortgages are loans to buy property for investment purposes, to generate income through rent or capital appreciation. Not all lenders offer investment mortgages, and the approval criteria can be stricter.
Non-Resident Mortgage
Non-resident mortgages are available to non-residents of the UAE who wish to invest in the UAE property market. These mortgages have shorter loan terms and higher monthly repayments.
Islamic Mortgage
Islamic mortgages, also known as Sharia-compliant mortgages, are for home buyers who prefer to avoid paying interest. Under Islamic financing principles, the bank purchases the property and then sells it to the buyer at a higher price, which is paid in instalments over an agreed period.
Mortgage by Property Type
Mortgages in Dubai can also be categorised based on the type of property being purchased. These include:
Residential Mortgage
A residential mortgage is a loan to buy a property for personal use. One cannot rent out or use the property for business purposes. Upon paying off the mortgage, the borrower will own the property outright.
Commercial Mortgage
Business owners take commercial mortgages to purchase property for their business operations. These mortgages have lower interest rates than business loans, and the property bought with the mortgage acts as collateral.
Land/Construction Mortgage
A land or construction mortgage is used to finance the land purchase or construction of a new property. These mortgages can be more complex than residential or commercial mortgages, as the loan amount is released in stages as the construction project progresses.
Mortgage Repayment Options
When taking a mortgage, you will need to consider how you want to repay the loan. There are two main repayment options:
Interest-Only Repayments
In interest-only repayments, you pay the interest on the loan for a set period for the first few years of the mortgage term. In this way, you make lower monthly payments initially but will have to make higher payments once the interest-only period ends and you start repaying the principal.
Capital and Interest Repayments
In capital and interest repayments, you pay off the interest and the principal loan amount each month. By the end of the mortgage term, you will have fully repaid the loan. It is the most common mortgage repayment option and can provide more certainty than interest-only repayments.
Mortgage Down Payments and Loan-to-Value Ratio
The mortgage down payment and the loan-to-value (LTV) ratio are related to purchasing a property. The down payment is the initial upfront payment made by the buyer, whereas the LTV ratio represents the percentage of the property's value that the lender is willing to finance. Let's understand this with an example. Suppose you buy an AED 200,000 house and make an AED 40,000 down payment. Your loan amount would be AED 160,000. If the appraised value is also AED 200,000, then the LTV ratio would be 80% (AED 160,000 loan divided by AED 200,000 appraised value).
In Dubai, the down payment for properties valued below AED 5 million is 15% for UAE nationals and 20% for expatriates. For properties valued above AED 5 million, the down payment requirement is 25% for UAE nationals and 30% for expatriates. The LTV ratio for mortgages in Dubai ranges from 80% for UAE nationals and 85% for expatriates.
Choosing the right mortgage is a vital part of the home-buying process. We hope this comprehensive guide helps you select the mortgage option that fits your financial situation and long-term goals. It is always best to seek advice from a licensed mortgage broker. Contact us today for expert mortgage broker services.
