It is important to compare fixed and variable rates, check the reversion rate, overpayment penalties and salary transfer clauses.
When looking for a mortgage, it can feel overwhelming to decide where to start, what to look for and ultimately choose the right lender and mortgage. This is especially true for first-time home buyers but can also apply to experienced buyers who are new to the UAE.
There are more than 15 banks operating in the UAE and each of them offers a variety of home loans with different rates, features and criteria.
It is important that you do your research before applying for a home loan. It is common for borrowers to first approach their own bank, where they hold their primary account, before looking elsewhere.
It is often the case that they tend to proceed with their own bank as this is viewed as the easiest option. However, it may not always be the best.
There are a few crucial aspects worth keeping in mind during your search for a home loan.
For many people, the most obvious place to start is rates. You should first decide whether to opt for a fixed or variable rate product. Investigate both options, keeping in mind your long-term goals and also the state of the market at the time.
A fixed-term mortgage is better suited to those who want more stability in knowing what their monthly repayments will be for a set period of time. Fixed-term mortgages tend to be for one, three or five years. A
variable rate mortgage could be an option if you are less risk-averse and want to take a chance at securing a lower rate that moves with the market.
Once you have decided between a fixed or variable rate, you will then look at the mortgage rates on offer.
Rates in the UAE can vary, ranging from 1.99 per cent to 5 per cent, depending on the lender, the product and your circumstances.
Shop around to see what different rates are on offer. Remember that the lowest rate does not always mean the best product.
Check the reversion rate
The one aspect many borrowers forget to consider when looking for a mortgage is the reversion rate.
The reversion rate only applies when taking a fixed-term mortgage. It is the rate that the mortgage reverts to when the fixed-term period comes to an end.
When comparing two different fixed-term mortgages, it is essential to take the reversion rate into account. It is often the case that the headline mortgage rate captures a borrower’s attention if it looks highly competitive on the surface.
However, it is necessary to consider what the reversion rate is and how it is calculated as this will give you an indication on what your instalment might be once the fixed-term period expires.
Adding purchase fees to the mortgage
When buying property in the UAE, in addition to the minimum down payment requirement of 15 per cent for citizens and 20 per cent for residents, there are fees of up to 7 per cent associated with the purchase.
These include Dubai Land Department charges, property agent fees and bank arrangement charges.
If you are buying in Dubai, it is possible to include a certain percentage of these fees within the mortgage.
What this means is that the cash required upfront to purchase is reduced as the lender will include some of the fees within the home loan and allow you to pay these back over time as part of your normal mortgage repayments.
However, not all lenders will allow the option to include fees. You will need to establish early on whether this is something you want to do and keep this in mind when conducting your research.
A question you should ask all lenders when doing your research is whether a salary transfer is a requirement for the mortgage. Some lenders require a salary transfer for certain mortgage rates or will offer you a reduced rate if you opt for it.
Whether you prefer a salary transfer or not is a personal choice but I generally advise clients against this to retain control and flexibility over their finances.
Rules on overpayments
When speaking with potential borrowers, a common theme is to pay off the mortgage as quickly as possible and it is worth checking to see if a lender will allow penalty-free overpayments.
Some lenders will penalise a borrower for paying off the mortgage faster than the agreed term.
If you intend to overpay on the mortgage, then search for a lender that will allow you to do this without incurring a charge.
Many lenders will agree to allow overpayments of up to 20 per cent a year without a penalty, with some even going up to 30 per cent.
Brendan Kennelly is a senior mortgage consultant at Mortgage Finder