With Dubai’s property market witnessing a steady flow of new supply, developers have created attractive payment plans in a bid to capture the attention of buyers to purchase built up stock. Rent-to-own schemes are gaining popularity amongst buyers, assisting them in getting into their first home faster by removing the pressure of a large down-payment. For developers, this initiative provides access to a wider pool of buyers, who may not otherwise have the up front capital to purchase otherwise – a mutually beneficial arrangement.
What is rent to own?
Each rent-to-own scheme is unique but, simply put, it’s an agreement between a developer and buyer where the equivalent of rental payments are used toward a down payment. This arrangement allows a buyer to simultaneously pay rent and “save” for a down payment. Other schemes are on a longer time span, such as 20 years. The amount required up front is about 5% or less, and instead of obtaining a mortgage, monthly payments are made to the developer and the property is paid off that way. An upfront payment is required (though substantially lower than the 25% required to secure a mortgage plus additional upfront costs) and once the contracted timeframe has passed, the buyer can choose to purchase the property, or exit the agreement.
The rent is typically higher than the market’s rate considering the convenience factor for the buyer, but the premium could be justified if you otherwise would not be able to save for a deposit.
Two types of agreements
- Option to purchase: Under this scheme, the buyer pays an ‘option fee’, a mutually agreed percentage of the purchase price, in exchange for the right to buy the property at a later date. Should you choose not to proceed with the purchase, you lose the option fee.
- Purchase agreement: All terms are mutually agreed upfront with the buyer and developer deciding on a fixed purchase price, or choosing to determine the price with a future valuation at an agreed date.
Is this a legal arrangement?
Yes. The Dubai Land Department (DLD) launched the rent-to-own (Ijarah) service, a specific title deed register to provide a clear legal framework to facilitate such transactions.
How does rent-to-own differ from a mortgage?
Buying a home via a bank mortgage is common practice, but the main hurdle faced by Dubai residents is the requirement for a minimum 25% down-payment, per UAE Central Bank regulations. In addition to this, there are further upfront transaction costs that must be accounted for.
The key difference between a rent-to-own scheme and a mortgage is the upfront payment required.
Upfront costs for a mortgage:
- 25% down-payment, from cash savings
- Approximately 7-8% of the property purchase price for DLD fees, real estate agent fees and bank fees, which can be financed through a personal loan.
Upfront costs for a rent-to-own scheme:
- Approximately 5-8% of the property purchase price
Benefits of rent-to-own
- Buying your first home is more affordable and accessible as the pressure of a large down-payment is removed.
- Rent payments help you build equity as each installment accumulates toward the acquisition of an asset.
- With rent-to-own schemes you can try before you buy, living in the property before you agree to proceed with the purchase.
- The application process for a rent-to-own scheme is typically less complicated than applying for a traditional mortgage.
What to watch out for
- You must clearly understand the terms and conditions of the agreement including market price fluctuations, title deed ownership throughout the contract, and the timeframe for payment and exit clauses, before signing the contract.
- You may end up paying a higher premium compared to the going rate for the same, or similar, properties that are not under a rent-to-own scheme.
- Should you proceed to buy the property, you should ensure you qualify for a mortgage to complete the purchase.
How does the payment plan for rent-to-own schemes look?
The payment plan under each rent-to-own scheme is unique as the terms are individually decided under a contract between the developer and the buyer.
Whilst the DLD has issued guidelines and associated fees regarding registration, financing, transfer and cancellation of rent-to-own contracts, the schemes created to date have been developed individually, on a case by case basis.
What should be included in a rent-to-own contract?
- Value of the property, agreed between developer and buyer
- Timeframe of the lease term, agreed between developer and buyer
- Title Deed ownership throughout contract duration
- Exit terms
- Penalty clause for defaulted repayments
- Percentage of down-payment, if any, to be refunded, should you decide to exit the contract
- Clause related to sudden job loss, missed repayments or mortgage rejection at the time of purchase (once the lease term ends)
- Property maintenance terms, who is responsible for the upkeep of the property throughout the contract duration
What are the fees for rent-to-own schemes?
As determined by the DLD, the following fees are applicable when entering a rent-to-own contract:
Seller (Developer) fees:
- 2% of the sale price
- 2% of the sale price and;
- AED 250 Title Deed Issuance Fee
- Map Issuance Fees (dependent on the type of property)
- 0.25% of the rent amount
- AED 4,000 Registration Fee for properties AED 500,000 or above;
AED 2,000 Registration Fee for properties less than AED 500,000
- AED 10 Knowledge Fee (added to each fee)