BEST PRACTICES WHEN APPLYING FOR A MORTGAGE IN UAE - PART 1
Mortgages are more than just a pathway to owning a home; they represent a significant financial commitment over a period of time. In Dubai, with its dynamic real estate market, understanding this commitment becomes even more essential. Potential borrowers must be aware of the financial implications, interest rates, and other associated costs to make informed decisions.
Given the ever-changing nature of the economy, both property values and interest rates can fluctuate. This means that understanding how these factors impact a mortgage is vital for anyone looking to secure a home loan in Dubai, whether they're current homeowners or first-time buyers.
In this blog, we'll explore five best practices for availing mortgages in the UAE. We aim to equip you with the knowledge and tools needed for effective management of your mortgage, ensuring a smooth and beneficial homeownership journey.
1. Opt For The Maximum Tenure
The tenure of a mortgage refers to the duration over which you repay the borrowed amount. It's often wise to opt for the longest tenure offered, as this ensures your monthly repayments, or EMIs, are more manageable. With lower EMIs, you have the flexibility to handle unexpected financial challenges without missing a payment
To further optimise your mortgage management, consider setting aside a monthly savings equivalent to 20% of the loan. At the year's end, this accumulated amount can be used for an early settlement. By doing so, you can request the bank to shorten your loan's tenure while keeping your EMIs unchanged. This approach allows you to clear your loan more efficiently, ensuring you're not overly committed for a prolonged period.
2. Leverage Offset Loans
Offset loans are where the bank offsets your current account balance against your loan value. Exclusive to UAE residents, this type of loan is a boon for those with steady finances, particularly if they're eyeing properties to buy in cash.
However, buying a property entirely in cash might seem appealing, but it can tie up a significant portion of your funds. Imagine spotting a lucrative investment opportunity in the market but if all your money is tied up in property, accessing those funds quickly becomes a challenge. You'd need to seek an equity release against your property, a process that, while available, can sometimes be time-consuming.
A more strategic approach? Consider availing an offset loan. For instance, if you're looking to purchase a property worth 2 million dirhams, instead of paying the full amount upfront, take an offset loan for half the amount and retain the other million in your bank account. This way, you're essentially leveraging your own money against the loan, resulting in zero interest. Plus, you maintain liquidity, ensuring you're always ready to capitalise on new investment opportunities.
3. Be Aware of Floor Rates
The floor rate is the minimum rate that a bank will charge you after its fixed period ends. Now, here's where it gets interesting: after this fixed period, the bank will charge you either a combination of its margin rate and the EIBOR or the floor rate, whichever is higher.
Why does this matter to you? Well, if market conditions are such that interest rates drop, a floor rate can prevent you from benefiting from these lower rates. For instance, if a bank's floor rate stands at 4%, but the combined rate of its 1.79% margin and a 3-month EIBOR (which might be 0.2% or 0.5%) totals less than 4%, you'd still be charged the 4% due to the floor rate.
A good practice is to always avail of a loan without a floor rate. This ensures that you can take full advantage of favourable market conditions and potentially lower interest rates. However, remember that each bank has its lending policies, and your financial profile will play a role in the kind of terms you're offered.
Parting Thoughts- Navigating the mortgage landscape in Dubai can seem like a daunting task, given its dynamic nature and the multitude of factors to consider. By understanding and implementing the best practices we've discussed, you position yourself to make the most of your mortgage, ensuring it aligns with your financial goals and lifestyle.
At My Mortgage, we're committed to guiding you through this journey. Our expertise in the Dubai real estate market, combined with a deep understanding of mortgage intricacies, ensures that you're always making informed decisions. Whether you're a first-time buyer or looking to refinance, our team is here to provide the insights and support you need.