What to consider before applying for a home loan in the UAE

Prospective buyers should first obtain mortgage pre-approval to confirm their budget before doing any serious property hunting.

Long gone are the days of feverish speculation making Dubai's property sector among the most volatile globally - today, end-users dominate the market and are relying on mortgage borrowing to help fund their purchase.

There are many factors for would-be borrowers to consider: from the upfront costs to deciding on the mortgage duration and whether to opt for a variable or fixed interest rate.

First, let's consider the initial costs. As per UAE Central Bank rules, expats must pay a minimum deposit of 25 per cent of the purchase price for properties sold for less than Dh5 million. In Dubai, in addition to this down payment, you'll need an additional four per cent transfer fee (less in other emirates) plus a 0.25 percent mortgage registration fee calculated on the loan amount. In all emirates, you'll typically pay two per cent real estate commission, a valuation fee of Dh2,500 to Dh3,000 and often a loan establishment fee of up to one per cent of the loan amount.

Together, these add about five to seven per cent to a property's cost - for example, buying a home for Dh1.5 million in Dubai would incur extra fees of over Dh100,000, according to the mortgage calculator on propertyfinder.ae's sister site mortgagefinder.ae.
There is some good news, however, that some banks are now allowing mortgage borrowers to add three-quarters of these purchase fees to their home loan. On a Dh1.5 million purchase, this would reduce the cash an expat buyer needs to pay upfront by almost Dh70,000. More for a UAE national.

Get pre-approval
Prospective buyers should first obtain mortgage pre-approval to confirm their budget before doing any serious property hunting. Signing a sales agreement requires the buyer to give a cheque for 10 per cent of the purchase price - should you commit before securing financial approval and are subsequently refused bank finance, you will forfeit the deposit.

Given that lending policies, fees and rates vary greatly between different banks, using a professional mortgage broker to advise you on the most suitable option will save you time, money and a lot of headache.

It is also vital that the buyer and seller agree to insert a clause in the sales agreement stipulating the transaction is subject to a property valuation by the bank. This will protect the buyer's deposit should the lender refuse to grant the mortgage on the basis the property is overvalued. Such valuations can also be completed before the sale agreement is signed, if preferred.

Banks typically limit mortgage lending so that repayments are no more than 25 per cent of a borrower's monthly income. Lenders will also take into account existing debts such as car loans or credit card debt when calculating how much to lend. Different banks, however, have different borrowing capacity calculation formulas. For someone earning Dh25,000 per month, the different lending policies between banks can mean a difference of Dh300,000 in your pre-approved mortgage limit.

In terms of mortgage duration, the maximum loan allowed in the UAE is 25 years for salaried people up to the age of 65 (70 for self-employed). A longer term minimises monthly payments but increases the total interest you'll eventually pay to the bank. We advise that you take the longest term as this will maximise your borrowing capacity and if you can afford it, make additional payments during the course of the loan. Borrowers can usually repay an extra 10 per cent of the principal amount remaining each year without penalty, so you can repay quicker if desired. Paying an extra 10 per cent per year on a Dh1.2 million loan will enable you to pay off your loan three years sooner and save you over Dh75,000 in interest.

Interest rates to rise
Mortgage interest rates are currently around 2.99 to five per cent, but are starting to creep up following rate rises in the US - the dirham's dollar peg means UAE interbank rates follow those of the Federal Reserve. The Fed's recent moves seem to herald the beginning of the end of nearly a decade of ultra-low interest rates and we strongly recommend borrowers secure a fixed rate for their mortgage. This is usually for a two-year period and UAE banks currently offer fixed rates of 3.5 per cent to 4.5 per cent, which is slightly above the variable rate.

Please pay attention to the "revision" rate. This is the applicable rate that you'll pay on your mortgage once the fixed rate period expires. Typically, these are linked to three-month, six-month or 12-month EIBOR plus a margin set by the bank. A mortgage with a low upfront interest rate can seem like a good deal but quite often these can be the most expensive mortgages over the term of the loan.

A borrower's interest rate and therefore monthly repayments will remain unchanged in a fixed rate mortgage, reducing the chances of them getting into financial difficulties but the revision rate could be much higher which will have a big impact on monthly mortgage payments. Let's reconsider the earlier example of a Dh1.5 million property purchased with a 25 per cent cash deposit plus 75 per cent of the fees added to the mortgage, leaving a mortgage of just over Dh1.2 million. A 3.5 per cent interest rate would make the monthly repayment Dh6,009, but if rates were to rise to 5.5 per cent, repayments would jump to Dh7,392 - that's an increase of 23 per cent.

Fixed rates
Some banks offer fixed terms of up to five years. The longer the fixed rate, the more expensive it is. Five-year fixed rates currently range from 4.75 to 4.99 per cent, which is considerably higher than the one- and two-year fixed rate but still very reasonable by historical standards and advisable for those seeking peace of mind.

Switching the mortgage provider has become dramatically easier in recent years. Previously, some banks would charge penalties of up to five per cent but this is now capped at Dh10,000. If you're still within your fixed rate period, the cost of changing banks may be higher. What's more common, however, is for a borrower's existing bank to compromise and offer sufficiently attractive terms for them to remain there. The headline rate is likely unobtainable because the incumbent bank will factor in the fees avoided from staying put, but the terms will be better than what's initially on offer - banks offer rates on a case-by-case basis so negotiation is essential.

Understanding the risks between fixed and variable rates and the different revision rates available in the market is important to every borrower. You can either talk to every bank in the UAE or to one good professional independent mortgage broker who can quickly list and compare the various options for you.

Different banks also have different policies towards where they work, whether or not they are self-employed, a UAE resident and the property being used as security.

Bank call centre staff have a bad habit of saying yes, yes, yes and then waste literally months of your time asking for endless documents, only to say sorry we can't help at the end.

In more advanced markets like the US, Australia and the UK, mortgage brokers write 50 to 75 per cent of all mortgages and is continuing to grow. Here in the UAE, it's less than 15 per cent but is growing as UAE consumers become better informed.

The writer is chief commercial officer of Propertyfinder. Views expressed are his own and do not reflect the newspaper's policies.