As Dubai’s property market continues its upward trajectory, potential homebuyers find themselves dealing with a crucial decision – opting for a traditional home loan or exploring the mortgage route.
This choice carries significant implications for long-term financial obligations and asset ownership, prompting experts to weigh in on the pros and cons of each option within the UAE’s regulatory landscape.
While both involve taking a loan using the home as collateral, there are key differences between a home loan and mortgage that prospective homeowners must understand to determine the best choice for their needs and circumstances. Here are the main distinctions between these two secured methods of financing a property, according to experts.
Home Loan vs. Mortgage: What is the difference when buying Dubai property?
“There is no major difference between the two terms; they essentially mean the same thing. A mortgage is a financial contract involving real estate as collateral for a loan, while a home loan is a type of mortgage specifically used for purchasing residential properties. In essence, a home loan is a subset of mortgages, designed for buying homes. The term “home loan” is used more often in Dubai,” Jeffrey De Souza, Head of Financial Services at Lomond Financials Services told Arabian Business.
De Souza explained that a home loan constitutes a more widespread term in the Middle East for a mortgage, while a mortgage represents a more recognisable phrase for European expatriates.
However, according to Mike Coady – a Dubai-based financial advisor with over 20 years of experience – while there is a “subtle” difference between the two terms, that there are pros and cons for each of them.
Coady explained that for buyers, a home loan typically offers lower interest rates, though it mandates a substantial down payment, stringent eligibility criteria, and the property itself serves as security.
On the other hand, a mortgage permits flexible usage for varied property types, accessibility to non-residents, and generally longer repayment periods.
However, mortgages carry higher interest rates for non-residents, potential for fluctuating interest rates leading to elevated long-term costs, and intricate approval processes.
But what are the requirements to take a mortgage when buying Dubai property?
Coady added that to qualify for a mortgage in Dubai, buyers generally must:
- Be over 21 years old;
- Have a valid UAE residence visa (for residents);
- Provide proof of income and employment;
- Have a good credit score;
- Provide necessary documentation such as passport copies, bank statements, and employment verification.
Speaking to Arabian Business, another expert, Jo Phillips – Managing Director at Phillips & Walls Mortgage Brokers in Dubai, said that mortgages allow buyers the purchase of property with bank assistance.
“Clients must either be employed or self-employed, with residents needing continuous employment, a visa, and salary paid into a UAE account. Interest rates currently range from 3.89 percent to 5.49 percent, varying by profile and employment status,” she said.
“As brokers, we tailor products to clients’ needs, as the lowest rate may not be optimal. Most take 25-year mortgages but maintain over-payment flexibility to reduce terms. The average mortgage life spans 8-10 years. Early repayment penalties follow Central Bank guidelines of AED10,000 or 1 percent of the loan amount, whichever is lower,” Phillips added, adding that a 20 percent deposit serves as collateral, with the purchased property itself as security against default.
Lomond Financial Services’ De Souza further explained that for an individual’s first mortgage or principal residence, lending institutions mandate a down payment equating to 20 percent in addition to fees, should the purchase price remain below AED5 million.
However, if the purchase price crosses AED5 million, the required down payment rises to 30 percent plus fees. For second and subsequent mortgages acquired for supplementary investment properties, lenders necessitate a higher down payment of 40 percent.
He also explained that interest rates vary from bank to bank and product to product, depending on cost and risk factors the lender incurs.
“Although a bank may offer the lowest fixed interest rate, the processing fees, insurance costs, and follow-on rates could result in the overall deal costing more than one with a slightly higher fixed rate. The maximum term for a mortgage is 25 years, although this is limited by your age. The mortgage term should not extend beyond your 65th birthday if you are employed or your 70th birthday if you are self-employed,” he said.
However, some banks may waive this fee after holding the mortgage for a certain period.
Steady income, good credit score key to making financial decisions before buying Dubai property
Coady added that in some cases, lenders may require additional security or guarantors, especially for higher loan amounts or riskier profiles, which is why it is best practice to consult a mortgage or financial advisors to make “well-informed decisions that support their overall financial health and long-term goals.”
“Ensure you have a steady income and a good credit score to secure favourable terms. Shop around for the best interest rates and understand whether a fixed or variable rate suits your financial situation. Be clear on the repayment terms, penalties for early repayment, and any additional fees involved. Consult with financial advisors or mortgage specialists to understand the best options tailored to your needs,” he said.
In addition to specific considerations surrounding home loans and mortgages, Coady explained that comprehensive financial planning proves paramount.
It’s crucial to have a clear understanding of your monthly cash flow to ensure you can comfortably meet your mortgage payments without compromising other financial obligations.
“Maintain an emergency fund that covers at least six months of living expenses. This provides a safety net in case of unexpected financial setbacks. Ensure you have adequate life and property insurance. Life insurance can protect your family in the event of your untimely demise, while property insurance safeguards your investment against damage or loss. Diversify your investments to balance risk and growth.
“Real estate is a significant asset, but it’s important to have a mix of other investments like stocks, equities bonds, and ETFs. Align your property purchase with your long-term financial goals. Consider how this investment fits into your overall plan for retirement, education expenses, and other major life events. Understand the tax implications of your property investment, both in Dubai and when you return to your home country. Effective tax planning can help you minimise liabilities and maximise returns,” he concluded.
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