Buying your dream home can be one of the most exciting things you can do in your life. In order to find the perfect property in Dubai, you must take several steps, including browsing online listings, meeting agents, talking with friends and family, and then visiting the property. It’s time to check out the types of mortgages in the UAE available to you after you’ve found the perfect home.
In this section, you will find information about the different mortgage types in UAE, their repayment options, and other terms that you should be familiar with.
Dubai mortgage types
Different types of mortgages are available to potential homeowners in Dubai. As it’s a long-term commitment, you need to weigh the pros and cons of each offer before deciding which is right for you.
Are you considering buying a home in Dubai? Here are the different types of mortgages available in the city.
Fixed-rate mortgage
A fixed-rate mortgage has an interest rate set before the loan term begins. Moreover, this rate doesn’t change over the pre-agreed period, which is usually less than five years. In some cases, you might be able to find a lender offering a fixed rate for the entire loan repayment period.
This system offers clear advantages to the borrower. The first benefit is that you can plan your financial outlay for years in advance. If the market situation changes and interest rates go down, you will be stuck with the original rate. With a fixed-lower rate, you will be at an advantage if interest rates rise.
To understand mortgage types in Dubai, you must study the market or seek expert advice. A fixed-rate mortgage isn’t the best option if rates are likely to fall soon.
Variable-rate mortgage
Variable or adjustable interest rate mortgages can have their interest rates change throughout the repayment period based on market conditions. Depending on the circumstances, borrowers can end up getting a lucrative deal or paying a higher return. Make sure you have sufficient financial liquidity to handle any increase in repayments if you decide to take out this type of loan.
Two categories of adjustable-rate mortgages exist.
Discounted rate mortgage
There are various types of mortgages in Dubai, but getting a discounted rate mortgage can be the best option in some cases. The interest rates are lower than the Emirates Interbank Offered Rate (EIBOR). Generally, the offer is reserved for first-time buyers.
If the lender’s interest rate is 4%, you will receive a 1% discount. As a result, your interest rate will be 3%. In the event that the lender’s base rate rises to 5%, your interest rate will also rise. If you are lucky and the base interest rate drops, you are likely to benefit.
Discounted rates generally apply for a two- to five-year period. After this point, your payment will be determined by the lender’s base variable rate. “Lifetime” discount mortgages are also sometimes available.
If you repay your loan early, you may need to pay an early repayment fee. It’s probably the best mortgage for first-time homebuyers in Dubai.
Capped mortgage
Dubai also offers capped mortgages, which offer some advantages to the borrower. Payments are variable, but there is a maximum cap before the loan term begins. The capped period is often for a limited period of time. Market conditions can influence interest rates, but there is a limit beyond which rates cannot rise.
At least initially, this allows you to plan your finances. With capped mortgage rates, you will, however, pay more than with discounted rates.
Remortgage
With a remortgage, you can get a new loan or transfer an existing mortgage. Interestingly, the same lender can offer this new loan, or you can find a new one. When the interest rate on the initial loan is low, people still remortgage because they need additional funds.
People remortgage to get a lower interest rate or a longer payment term. Remortgaging involves paying a closing fee.
Offset mortgage
An offset mortgage combines a traditional mortgage with one or more deposit accounts. Through an offset mortgage, borrowers can link their savings/current/credit card to their loan account, and the more money they have in their account, the less interest they will pay.
The linked account allows you to access the money. If you choose conventional overpayments, the money will be transferred directly to your lender.
Offset mortgage interest rates are slightly higher than conventional mortgage rates. Additionally, you may have to pay an annual fee at the end of the year. Therefore, you may have to consider some financial factors when choosing mortgage types in Dubai.
Investment mortgage
An investment mortgage is a loan obtained to purchase a property as an investment. Here, the goal is to generate a new revenue stream either by renting out the property and getting work done or by reselling it. In this case, a multi-unit building with two to four units or a single-family house is considered. A building with five or more units is considered commercial real estate, which has different rules.
Dubai has some popular investment areas. You can buy apartments or villas in a neighborhood that suits your needs.
Non-resident mortgage
This type of mortgage is available to non-residents of the UAE. This type of mortgage is available to customers who meet the following criteria.
- A financial institution will only accept applications from citizens of countries on its approved list
- Salaried or self-employed
- Have a minimum monthly income (after tax deductions) as determined by the bank
In such cases, banks typically finance up to 50% of the property. In addition, the loan term is short, and monthly payments are also higher.
Mortgage by property type
Dubai also categorizes mortgage types based on property types.
Residential mortgage
An individual acquires a residential mortgage in order to buy a home to live in. It cannot be rented out or used for commercial purposes. An interest rate for a residential mortgage can be either variable or fixed.
Upon paying off the mortgage, you will own the property outright. These mortgages are typically long-term. Remortgaging is also an option.
Commercial mortgage
Business owners use commercial mortgages to purchase properties for their businesses. The property will not be your primary address. Instead, it will be an asset. A commercial mortgage typically has a lower interest rate than a business loan. The property you buy serves as collateral for the loan.
Initially, substantial deposits are paid to the lender. So you have to figure out if you can take money out of the business without hurting it.
Land/construction mortgage
In Dubai, a loan secured by property can be used to finance the purchase of land, renovations, or construction of a building. By using this mortgage, you will receive the money you need in advance for each part of the project. Please keep in mind that this is a lengthy process, and the loan does not cover the design phase. You are responsible for the initial investment.
Mortgage repayment options
Different mortgage repayment options are available. Borrowers often use a combination of options to repay their loan, depending on their agreement with the bank.
Interest-only repayments
Offered only with off-plan properties and for a maximum of five years, interest-only repayments require you to pay only the interest on your loan, not the principal. At the end of your term, you can repay the capital together or refinance your loan.
Capital and interest repayments
The most common type of repayment involves the borrower paying the EMI that covers the principal and the interest each month over a predetermined period of time.
The first few years of the loan period will usually have a higher interest rate. In subsequent years, however, the interest rate goes down and the loan amount increases. According to UAE practice, mortgage repayment periods are up to 25 years or until 65 years of age for salaried ex-pats or until 70 years of age for UAE nationals and self-employed ex-pats – whichever comes first. According to UAE practice, mortgage repayment periods are up to 25 years or until 65 years of age for salaried ex-pats or until 70 years of age for UAE nationals and self-employed ex-pats – whichever comes first.
Down payment
The amount of your initial deposit will differ depending on the bank, mortgage broker, and type of loan you choose. Typically, if you are an ex-pat purchasing a property for personal use, you will have to pay between 25% and 35% of the property’s value as a down payment. Off-plan properties, however, typically require a larger down payment of up to 50%. There is also a minimum salary requirement for home loans.
Mortgage life insurance
In the event of a borrower’s death, this insurance will cover your mortgage payments. When borrowers have dependents who plan on residing in the mortgaged asset after the borrower’s death but are unable to make the payments, this policy will provide them with peace of mind. Those with disabilities and terminal illnesses are also protected.