Congratulations! You have taken the giant step to own your property! I hope this article will help you assess and find the best mortgage on the market.
How much time did you spend shopping around for your best pair of shoes ? Well, you should be willing to spend at least twice that time shopping around for a mortgage. There are 30+ banks in the UAE offering more than 300 home loan products. You need to be able to understand the terms of every home loan to know if it is the right mortgage for you.
Here are 10 things to keep in mind when shopping for a mortgage:
1 - The mortgage with the lowest interest rate might end up being the worst option
Make sure you are comparing apples to apples in the mortgage world. Which is better: a mortgage with a reducing rate of 3.24% or a mortgage with a flat rate of 1.79%? Hint: it is a trick question - both mortgages cost the same. Sometimes banks quote a flat rate for marketing purposes. Make sure you check if the rate you are looking at is a flat rate or reducing rate. In case you don't know the difference, a flat rate is the interest or profit paid on the full mortgage amount every year. A reducing rate is the interest or profit paid on the outstanding mortgage amount every year. To calculate the equivalent reducing rate, multiply the flat rate by 1.814. Note - It is very common to speak in reducing rates rather than flat rates in the mortgage world as most available home loans are reducing rate loans.
Ok moving beyond this caveat: Let's consider the following scenario:
Now the main question to ask your bank is: what is the reverting rate ? Meaning, once my fixed period is over what's the new rate I need to pay ? Usually the answer will be a fixed margin (around 2-3%) + the EIBOR (3months or 6 months).
In this case a loan with a 3.25% rate could easily convert to a 5-6% rate if not more based on what the EIBOR rate is at that time. Currently as of December 2017, the EIBOR rate in the UAE is 1.57367% (3-month EIBOR) and 1.8145% (6-month EIBOR). The EIBOR stands for the Emirates Interbank Offered Rate. It is highly influenced by the US Federal Reserve interest rate as the dirham is pegged to the dollar. With interest rates expected to increase, the EIBOR rate in 18 months time might be north of around 2%. This means, it is very likely to see your new rate floating at around 5% in 18 months constantly increasing as the EIBOR increases.
Let's say you are thinking of buying this property as an investment and of selling it in 5 years time. It might be a good idea to secure a fixed rate for the whole period to avoid any surprises, even if that means paying a higher rate in the beginning. A longer fixed period is less risky and you will always have the chance to re-finance if EIBOR rates drop in the future.
2 - Check to see what happens to your rate if your employment status changed
Certain banks require a salary transfer. This means having a running account with the bank prior to applying for a mortgage. A salary transfer could cost you big time in the event that your employment status changes. A bank has the right to hold your end of the service gratuity until you are able to provide them with a new employment visa. In the case you chose to leave the country, the bank has the right to switch you to a more expensive non-resident home loan.
In general it is important to be aware of home loans that require a salary transfer. Especially if you think your employment status might change over the coming years.
3 - Check to see your insurance options
To take a mortgage, you will need to secure both a property and a life insurance over the term of the loan. Certain lenders might be willing to offer you free property insurance after a bit of negotiation. At EquityFinders, we make sure to help you find the right mortgage and waive as many fees as possible (property insurance is one of them).
When it comes to life insurance, the owners registered on the title deed need to be insured. This means you and potentially your spouse will need to secure life insurance policies. Some banks require you to chose their own life insurance policy which might very well end up being more expensive than other life insurance policies.
You need to know if you can choose your own life insurance provider. Also take into account your age and health condition (are you a smoker or not) and think of how you want to pay your life insurance. You might have the choice of getting a pre-paid life insurance and adding the payments to your monthly mortgage payments, but this does come at a cost (You will be effectively paying twice or three times the insurance policy amount - after interest, and you will be losing more equity in your property).
4 - Know your transaction costs and check if you can include some in your financing
If you are buying a property in Abu Dhabi - you are looking at paying the following transaction costs:
If you are buying a property in Dubai - you are looking at paying the following transaction costs:
Property Registration Fee
Mortgage Processing/Arrangement Fee
Mortgage Registration Fee
For off-plan property buyers are required to pay a 4% Oqood Fee
Four things to note here:
Abu Dhabi property fees are considerably lower than in the neighboring emirate of Dubai where the property transfer fee as levied by the Dubai Land Department is 4% and not 2%.
Mortgage processing/arrangement fees could be negotiated and some banks are more likely to waive this fee than others. Due to the volume of business we write, EquityFinders has agreements with leading banks to save you money by waiving the mortgage processing fees either fully or partially.
With EquityFinders we can connect you straight to the seller, so why pay 2% agent commission fees?
With EquityFinders we provide our clients with a free valuation, meaning you get to save around 3000 AED of upfront costs.
5 - Know what costs you will incur if you decide to break the loan
Lets say you want to sell or re-finance your property. In this case you will need to break the loan. According to UAE Central Bank regulations, banks are permitted to charge a maximum loan break cost of 1% of the loan amount or 10,000 AED, whichever is the lower. However in the case that you want to break the loan during the fixed period, certain banks will charge even more than the set limit.
Make sure you ask your lender about break costs and check all possible scenarios.
6 - Know what fees you will accrue if you decide to make additional re-payments
Lets say your employment status improves. You get promoted and all of sudden you want to start paying back your mortgage at a faster rate. In this case where you intend to make additional repayments, the bank is allowed to charge you re-payment fees. Most banks in the market however will allow you to make re-payments of up to 20% of the loan amount before they charge any fees.
7 - Understand what counts as income and what doesn't
Definitions of income vary from lender to lender. While all lenders are happy to consider fixed income sources (such as a salary). Some lenders might not be willing to include variable income sources. This means if your job is heavy commission-based or if it entails a hefty performance bonus, then you need to double check which bank is willing to count this as income and how that calculation is made. Also if you already own property, lenders usually are open to considering current rental income from your properties either fully or partially. At equityfinders, we refer you to the correct lender knowing your current and future income status. Make sure your mortgage advisor understands these differences.
8 - Check which banks are willing to finance a project if you are looking to buy an off-plan property
Not all lenders finance on-going off-plan projects. Certain lenders have preferred developers that they work with. It is crucial you know which banks have the best deals with which developers. At EquityFinders, we have extensive knowledge of the financing landscape and can get you the best deal for financing your off-plan payments.
9 - Check your eligibility and the mortgage constraints
Most lenders might have a minimum acceptable salary limit (anywhere between 7,000 to 15,000 AED) so make sure you meet these requirements. While some loans might be more attractive to others, there are two main things to consider:
10 - Make sure your mortgage advisor has done their homework
It is highly advisable that you reach out to a mortgage broker. Make sure your mortgage broker has done their homework, compared most of the available loans on the market for you and carefully explained to you the details, terms, costs, and any hidden caveats of each mortgage.
We highly recommend you reach out to an EquityFinders accredited mortgage advisor. With 15+ years of experience in the UAE real estate market, the team behind EquityFinders is by far your best bet to find the perfect mortgage solution for your needs.
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