Once you have made the decision to purchase property in the UAE, you will need to secure finance to complete the transaction. Buying a property outright with liquid assets or personal savings is not a reality for most, and completing the home buying journey is only possible with a mortgage. Here are a few points to consider when looking for home finance.
It is important to first understand the eligibility criteria as clearly defined by the UAE Central Bank.
For UAE nationals:
- For properties valued at AED 5 million and below: maximum loan amount of 80% of the value of the property.
- For properties valued above AED 5 million: maximum loan amount of 70% of the value of the property.
- For the purchase of second or investment property: maximum loan amount of 65% of the value of the property.
- For properties valued at AED 5 million and below: the maximum amount you can borrow is 75% of the value of the property.
- For properties valued above AED 5 million: the maximum amount you can borrow is 65% of the value of the property.
- For the purchase of second or investment property: the maximum amount you can borrow is 60% of the value of the property, applicable to ready property only.
For off-plan purchases, the maximum you can borrow is 50% of the value of the property – this applies to UAE and GCC citizens, and Expats.
The following factors will determine your borrowing capacity:
- Monthly income
- Current debts: under UAE Central Bank regulations, no more than 50% of your total income should be spent on repaying debts including mortgages, credit cards, loans etc., this is commonly referred to as your Debt Burden Ratio (DBR)
- Employment status; salaried employee or self-employed
- Property value
- Age: UAE Central Bank regulations stipulate a maximum loan term of 25 years up to the age of 60 for salaried individuals or 70 for self-employed borrowers
- Lifestyle factors: i.e. number of dependents, general living expenses etc.
- Credit score
Ultimately, it all comes down to what the bank determines you can comfortably afford. Banks in the UAE use the Debt-Burden-Ratio (DBR) to calculate how much you can afford to borrow. Your DBR is your monthly debts (inclusive of future mortgage repayments) as a proportion of your monthly income. Banks will also apply a slightly higher interest rate to calculate your future mortgage repayments to account for potential interest rate hikes. Each bank’s formula in calculating affordability differs slightly, but as a general rule of thumb, your monthly salary must be at least 4 times higher than the expected monthly repayments.
Types of Mortgages
When assessing your options for financing you should shortlist mortgage providers, compare available interest rates and understand how the rate is applied. It’s also important to assess all the terms and conditions that come with each associated mortgage product as the interest rate is not the only factor to consider.
Fixed rate mortgages
Fixed rate loans generally last for a term of between one to five years, with three years being the most common. Once the fixed term ends, the rate will automatically move to a reversion rate.
The main advantage of a fixed rate loan is certainty. Fixing your loan ensures you are not exposed to interest rate fluctuations and your monthly repayments remain consistent for a set period of time, making it easier to budget.
Variable rate mortgages
Variable rate loans fluctuate based on the Emirates InterBank Offered Rate (EIBOR). With variable interest, your monthly repayment amount may change, which may impact predictability in your monthly expenses.
Discounted rate mortgages
A discounted rate mortgage is based on a standard variable rate, where the lender grants a percentage discount for a specified period of time. The discount is applicable for a set period of time only, not for the full tenure of the loan.
Some lenders offer an offset mortgage option, where a savings account or current account is linked to your home loan. Any cash balance that sits in this account saves you interest on your loan, with interest calculated on the difference between your loan balance and savings balance.
Remortgaging is the transfer of your existing mortgage to a new lender. The purpose of refinancing is usually to obtain a lower interest rate or to release built-up equity.
In addition to the minimum down-payment required to secure a mortgage, borrowers must also demonstrate their ability to cover additional one-off upfront costs which amount to approximately 7-8% of the property’s value.
Some banks may allow you to add a small amount of the upfront purchase costs to your mortgage, freeing up more cash to put towards your down-payment. This would in turn allow you to purchase a more expensive property.
If you’ve allocated all your savings toward the purchase of your property, you may struggle to pay your mortgage repayments initially. Some banks allow you to defer your repayments for up to six months, helping you to get back on top of your finances before your repayments start.
Tips for saving for a down payment:
- Start saving several years before you intend to purchase: Have an idea of what kind of home you want to buy and what communities you desire in order to put together an approximate value so you can guide your savings goals. Open a dedicated savings account and allocate a certain amount of your monthly income to this each month. This can become a forced saving mechanism that will help curb your desire to splurge elsewhere. To accelerate savings, mindful spending is crucial. Keep a watchful eye on your grocery, water and electricity bills, as well as, entertainment and dining out.
- Move any overseas savings or investments to the UAE: use an established currency exchange as they can often provide sharper rates than banks.
- Release equity from any existing property held in the UAE or overseas: equity from one property can be used to fund the purchase of another.
- Inheritance: if you have family members who you expect to inherit from, it is worthwhile talking to them about assisting in funding your down-payment. This is especially relevant in countries such as the UK, where a tax of up to 40% is charged on the value of a person’s estate.
If you are looking to remove the stress of a down-payment and upfront costs altogether, a rent-to-own scheme may suit you better and get you into your first home faster.