Managing your finances to buy your dream home can be a stressful task if you are short on budget. This is where a mortgage steps in allowing you to buy property, without paying the entire purchase amount up front.
You can later repay the borrowed amount through payments scheduled over a specific period. In this guide, we will discuss the different types of mortgages in Dubai to help you choose your ideal one.
Different Types of Mortgages in Dubai
Detailed below is a comprehensive overview of the different types of mortgages in Dubai.
1. FIXED-RATE MORTGAGE
This type of mortgage has a pre-set interest rate that remains the same for a certain repayment period. The interest rate on the principal is determined, at the discretion of the mortgage lender, before the repayment period begins. Therefore, there are many things you should be aware of before getting a mortgage in Dubai.
The fixed-rate mortgage is usually less than 5 years. However, the interest rate is changed to a higher rate once the fixed period ends. This reversion rate is higher than the Emirates Interbank Offered Rate (EIBOR). The same process continues until the mortgage is completely paid off.
PROS
- Protection from an increase in interest rates
- Easier to budget loan repayments
CONS
- A higher reversion rate hits the mortgage borrower once the fixed period expires
- No gain from a decrease in EIBOR
Thereby, fixed-rate mortgages are good for those mortgage seekers who prefer shorter repayment terms.
2. VARIABLE RATE MORTGAGE
Contrary to the fixed rate mortgage, the interest rate of a variable rate mortgage remains variable over the repayment period. This means that the interest rate of this home loan in Dubai depends on the fluctuations in EIBOR.
Such a type of mortgage in Dubai is a good option for those having enough financial liquidity to deal with EIBOR fluctuations.
PROS
- If the EIBOR falls, then you will pay less interest on your mortgage
CONS
- Difficulty in setting a budget due to fluctuations in the interest rate
- A rise in EIBOR will result in higher interest rates and consequently higher monthly payments
The two types of variable rate mortgage are discounted rate mortgage and capped mortgage.
A. DISCOUNTED RATE MORTGAGE
This type of variable rate mortgage has an interest rate set at a percentage lesser than the base rate of the lender. Discounted rate mortgages are usually offered as introductory loans by official lenders to first-time property buyers.
It is one of the types of mortgages in Dubai in which the borrower receives a discount on the lender’s standard interest rate. Then the borrower repays the amount at that discounted interest rate for a specified period, usually 2-5 years.
However, once the discounted rate period expires, the interest rate may change based on the market trend. For example, if a lender has a base interest rate of 4% and you get a 1% discount on that, then you will pay an interest of 3%. Whereas in case the lender’s interest rate goes up to 5% then you will pay an interest of 4%.
PROS
- Discounted interest rate than the lender’s base interest rate
- If EIBOR falls you get to pay a lower interest rate than the already discounted rate
CONS
- A rise in EIBOR affects the interest rate that can disturb your monthly budget
- When the tenure of discounted interest rate ends, the monthly instalment increases as you revert to the lender’s standard interest rate
- A penalty is charged if you switch from discounted rate mortgage to any other plan
A discounted rate mortgage is best for those individuals who have a tight budget in the early years of mortgage repayment but can afford an increase in monthly instalments later.
B. CAPPED MORTGAGE
Among the different types of mortgages in Dubai, the capped mortgage is a variable rate mortgage with a marginal interest rate. This marginal interest rate is referred to as an interest rate cap, above which your payments cannot exceed. This type of mortgage in Dubai typically has a repayment period of 2-5 years.
A capped mortgage prevents the borrower from fluctuating EIBOR. For instance, if the EIBOR rises, your monthly instalment will increase proportionally but not above the predetermined cap.
PROS
- Even if the EIBOR rises, your monthly repayment cannot cross the cap
- You can benefit from lower repayments if EIBOR falls
CONS
- Capped mortgages are rarely offered by official lenders, therefore, are difficult to find
- It costs more as you have to pay for the security that the interest cap offers
- Interest rates can still increase due to a rise in EIBOR, but not above the capped limit
- An early repayment penalty is charged if you pay off your repayment completely or switch to another plan
A capped mortgage is good for those who want repayment security.
3. REMORTGAGE
The process of getting a new loan to replace an existing one, for the same amount or more, is termed refinancing or remortgaging. It is mostly done to cash out property equity.
A remortgage can also be considered a loan renewal if the second loan amount is the same as what you owe on your current mortgage repayment.
PROS
- Lower monthly payments can be secured by remortgaging into a mortgage with a lesser interest rate or when EIBOR falls
- Remortgaging can help you repay quickly at better repayment terms
- Some amount from your home equity can be cashed out if you remortgage
CONS
- A remortgage can increase the mortgage length and monthly repayments, reducing the monthly income for other expenses
- A penalty will be charged if you remortgage before the current mortgage term ends
- The process of remortgaging is time taking
Remortgaging is best for those who want to benefit from lower monthly repayments and interest rates. Also for those who want to cash out their property equity.
4. OFFSET MORTGAGE
A mortgage connected to more than one deposit account is termed an offset mortgage. Under an offset mortgage, borrowers can connect their savings account with the loan repayment account. This allows you to make temporary overpayments on your loan with your savings.
The linked account’s funds are accessible to you all the time. But if you choose conventional overpayments, your lender will get your funds right away.
PROS
- Can be paid off earlier than the mortgage period through higher monthly repayments
- Helps in saving money by lowering the total interest paid on a mortgage
CONS
- The interest rate on an offset mortgage is higher than on a conventional mortgage
- The interest rate is a variable one so a rise in EIBOR can increase the interest
- A yearly fee is charged
An offset mortgage is beneficial for those who want to pay off their mortgage early.
5. INVESTMENT MORTGAGE
An investment mortgage is one of the types of mortgages that you take to buy property in Dubai or for investment purposes. The objective in this situation is to create a new source of income by either renting property or selling it.
In such cases, investment property can be either a single-family home or a building with up to four units. Buildings with more than four units come under commercial real estate and are subject to distinct regulations.
PROS
- You might earn a higher profit through the investment property through which you can pay off the mortgage repayment earlier
CONS
- Fewer lenders offer investment mortgages
This type of mortgage is good for those who want to earn profit through property rentals or secure a home for themselves. However, there are various financial factors that you must take into account while selecting types of mortgages in Dubai.
In Dubai, there are many hot investment spots. The following listings can help you find an ideal property for sale in Dubai.
6. NON-RESIDENT MORTGAGE
The non-resident mortgage can be taken by the non-residents of the UAE. A bank offering a non-resident mortgage typically funds up to 50% of property value only. Also, the repayment period is shorter while the monthly instalments are higher.
PROS
- Foreign investors can get this mortgage to invest in the real estate market of the UAE
CONS
- The monthly repayments are higher due to a shorter loan term
- Banks offer finances only up to 50% of the property value for non-residents of the UAE
MORTGAGE BY PROPERTY TYPE
The different types of mortgages in Dubai can also be categorised based on the property type. Such mortgages are detailed below.
RESIDENTIAL MORTGAGE
Residential mortgages are loans taken by people to purchase a property as their primary residence. Renting out or using this place for business is not permitted. For a residential mortgage, you can pick between a variable and fixed interest rate.
You will possess complete ownership of the property after the mortgage is paid off. The repayment is scheduled over a specified time. While a typical residential mortgage offers 25 years as the repayment period. A residential mortgage can also be remortgaged.
However, before you plan to secure a mortgage, it is better to understand the structure of mortgages in Dubai and know how they process.
COMMERCIAL MORTGAGE
A commercial mortgage is one of the types of mortgages in Dubai, taken by business owners to purchase real estate as a corporate asset. This property cannot be your primary residence.
Complete property ownership can be secured after the mortgage is paid off. An interest rate on a commercial mortgage is lower than that on a business loan. The asset you buy serves as collateral.
Initially, higher payments are made to the lender. Therefore, you must be aware of whether you can withdraw funds from the business without having a negative effect.
You can find your ideal property from these commercial properties for sale in Dubai.
LAND AND CONSTRUCTION MORTGAGE
It is one of the types of mortgages in Dubai used to restore an existing structure, start a new construction project or buy land for construction purposes. In a construction mortgage, the total amount is broken down into portions which the borrower receives to complete each project milestone.
However, paying off the construction mortgage is a time taking process. Also, you might have to remortgage into a loan with a longer repayment period. The drawback is that the design phase of the building contract is not covered under the land and construction mortgage.
You can have a look at these lands for sale in Dubai if you are looking for one at affordable rates.
This wraps up our guide on the different types of mortgages in Dubai. Now that you know what are the different types of mortgage loans in Dubai, it is recommended that you consult a licensed mortgage broker for identifying the most suitable mortgage for you. Also, getting a mortgage pre-approval in Dubai can streamline your property purchases.
FAQs
What is the difference between mortgage and payment plan?
A mortgage involves borrowing against a property’s value from a bank, granting immediate ownership with repayment over time. In contrast, a payment plan, mostly offered by real estate developers in Dubai, allows gradual property payment in instalments, with ownership transferring upon completion. Here is a detailed comparison of mortgage vs payment plan for your understanding.
How can I secure a luxury property mortgage in Dubai?
You can secure a luxury property mortgage in Dubai by following some basic tips. These include preparing a deposit of 20-35% based on residency and property value, gathering necessary documents and checking your credit score. Moreover, you must also strengthen your borrowing power by increasing income and reducing debts.
What is the maximum mortgage duration?
In Dubai, mortgages typically have a maximum duration of 25 years. However, whether salaried or self-employed, borrowers are expected to complete repayment before retirement age, which is 65 years for salaried individuals and 70 years for self-employed individuals.
What should I consider before buying a mortgaged property in Dubai?
Before purchasing a mortgaged property in Dubai, it is important to ensure legal compliance by verifying that the property and mortgage adhere to Dubai’s regulations. Secondly, research market trends to make informed investment decisions based on current and future projections. Thirdly, assess your financial stability to meet mortgage obligations, factoring in potential income fluctuations. Lastly, seek legal assistance from professionals to understand the legal complexities associated with purchasing mortgaged properties.
How can I sell a mortgaged property in Dubai?
To sell a mortgaged property in Dubai, find a buyer, possibly through platforms like dubizzle. Upon securing a buyer, sign Form F (MOU) and proceed with the necessary steps. Then, obtain a liability letter from your bank and a No Objection Certificate (NOC) from the developer to identify the remaining costs. Later, block the property at the DLD and pay associated fees. Once cheques are cleared and documents are processed, process property ownership transfer in Dubai with the DLD.
How can I request a mortgage transfer in Dubai?
DLD is the governing body that regulates all mortgage transfer requests in Dubai. The customer can request the transfer online or by visiting any of the Real Estate Trustees’ offices. The service time is 15 to 20 minutes. Once the request is approved, the title deed is issued to the customer.
That said, if you want to learn more about mortgages, read this comprehensive overview of property mortgages in Dubai and Abu Dhabi.
You can buy your dream home by opting for any mortgage type in Dubai. If you are still hunting for property, you can consider buying one from these properties for sale in Dubai.
Stay tuned to the UAE’s leading property blog for more information on the real estate industry.
