Money clinic

Buying a piece of the Dubai dream is now easier than ever for expatriates. Our step-by-step guide to mortgages.
Money clinic
By Administrator
Sun 23 Sep 2007 04:00 AM

Buying a piece of the Dubai dream is now easier than ever for expatriates - thanks to the wide selection of mortgages on offer from both local and international banks. The introduction of new laws last year made it possible for expatriates to buy freehold property in the emirate - and that combined with increased consumer confidence, means Dubai's mortgage market is booming.

There are over 11 banks providing mortgages in Dubai - and the sector as a whole is growing at a rate of 50% year on year.

Customers should be aware that banks that offer high loan-to-value ratios may balance this out with high interest rates or processing fees to make up costs.

But while there is a wide range of financing opinions available - expatriates must be aware of what makes mortgages in Dubai unique before taking the plunge and buying property.

Step one
Your developer and your mortgage

The first step to getting a mortgage in Dubai is to find out which mortgage provider you are actually eligible to apply to depending on the actual property you going to be purchasing.

Unlike in countries such as the UK, buyers are limited in their choice of mortgage by the property they are buying.

They can only get a mortgage from a provider, which has already established an agreement with the developer to provide finance for their particular property.

In Dubai expatriates are only permitted to buy property in areas designated by the government.

The majority of the homes in these designated areas are built by Dubai's three main developers - Nakheel, Emaar, and Dubai Properties - whose developments make up 70% of Dubai's property market.

Most mortgage providers will give mortgages for properties built by those developers.

However, those who buy property built by smaller developers may be limited to a choice of just one or two mortgages from providers that have agreed to finance those properties. The advantage of the system is that it provides buyers with some reassurance, and that most mortgage providers will carefully assess the properties built by smaller developers before choosing to finance them. They act as a screening agent for buyers and assess both the reliability of the developer and the development itself.

The downside is that some properties will have no mortgage providers at all attached to them which means anyone who signs a contract for the property and puts down a deposit before checking there is a mortgage available for that property could be left in a very tricky position.

Independent mortgage broker Chris Allen of Sphere Mortgages warns that this is a fairly common scenario and strongly advises customers to check with the developer of the property they wish to purchase before signing a contract or paying a deposit.

"There are lots of properties out there without any lenders attached to them. I get loads of people contacting me saying they are buying a property and then they tell me which one and I tell them there is no one available to finance that property. And there really isn't a lot you can do about that other than sell the property straight away."

Conventional or Islamic

Once buyers find out which mortgage providers they can apply to finance the property of their choice - they can decide whether to go for a conventional or a Sharia-complaint offering.

The cost of Islamic and conventional finance does not differ. What makes the two different is the way in which the products are structured.

Interest is not charged on Islamic home finance - instead a profit rate is calculated and incorporated into the monthly mortgage repayments.

Another key difference - and one which makes Islamic home finance attractive to many - is the fact that buyers of off-plan property do not need to make any payments until the construction of their property is complete.

This compares to conventional mortgages where customers will be charged interest on the repayments owed under the repayment schedule regardless of whether the property's construction is delayed or not.

There are two main types of Islamic home finance - Murabaha or Ijara. Murabaha is where the bank buys a property on behalf of a customer then sells it back to them at a fixed profit rate.

The customer then pays the bank back in fixed monthly instalments.

Ijara is a form of leasing agreement where the mortgage provider buys the property in its name then leases it to the customer who assumes full ownership once the mortgage repayments have been made.

Islamic finance providers also offer Istisna'a for customers who are constructing a property.

The bank takes on the construction of the property then sells it back to the customer once the construction is complete.

Although many expatriates are initially unfamiliar with the concept of Islamic financing, it is a very popular option with Islamic home finance providers Amlak and Tamweel dominating the mortgage sector with a 70% market share.

Step one check list:• Once you have selected a property find out which mortgage providers have agreed to finance it.

• Do not sign a contract or pay a deposit to the developer until you know for sure that you can get a mortgage for that property.

• If you have the option, decide whether to go for an Islamic or a conventional mortgage based on the different ways in which the products are structured.

Terms and conditions
Loan-to-value ratiosThe loan-to-value ratio is the percentage of the value of the property that the bank will actually finance.

In Dubai banks finance up to 95% of the value of properties and in some cases 99%, and the maximum mortgage given is around US$1.36m (AED5m).

Customers should be aware that banks that offer particularly high loan-to-value ratios may balance this out with high interest rates or processing fees to make up their costs.

You never know whether you are eligible for a mortgage and what factors might stand against you.

For properties that are bought directly from the developer the bank will usually provide a mortgage that is a percentage of the original purchase price and will accept this price on face value.

However, in the case of properties bought from the secondary market banks may carry out their own valuation - and could price the property at a lower level than the purchase price the customer has paid for it.

Interest rates

Interest rates charged by UAE banks range from around 7.25% to 9%.

A handful of banks offer fixed interest rates but usually only on a temporary basis.

Customers can, according to Allen, negotiate lower interest rates with UAE banks by taking a loan with a lower loan-to-value ratio - or by having an existing relationship with the bank.

He says: "The less you are borrowing loan-to-value wise, the best interest rate you will get. Also there are instances where they might knock some interest off."

"For instance the headline interest rate may be 8% but if you bank with them, put your salary with them or take their insurance, you might get a better deal," he goes on to say.

Processing fees

Processing fees are charged at around 1% of the value of the mortgage by most banks in the UAE.

Some banks also offer special promotions with a maximum cap on processing fees - offers worth taking advantage of if you are taking a mortgage with a high loan-to-value ratio.

Although banks on the whole will be transparent about processing fees and these can be calculated easily, Allen advises customers to beware of any additional administrative costs that may crop up - and recommends that they should put aside around 10% of the purchase price of the property for unexpected costs during the application and processing stage.

Early settlement fees

Mortgage experts agree that customers should pay close attention to the early settlement fees attached to a mortgage - particularly expatriates who do not intend to remain in Dubai for the long-term.

There are three scenarios in which customers will be charged early settlement fees - if they pay the loan off early, they sell the property before paying off the mortgage or they transfer the mortgage to another bank.

Some banks charge no early settlement penalties at all - while others charge anything between 1% to 3% of the remaining value of the loan.

And if you are talking about a mortgage worth AED2m (US$544,000) that is a substantial amount of money.

There are also home finance providers, such as Tamweel, which charge a higher penalty the earlier a buyer sells a property - but will reduce this charge or even cut it out altogether the longer a buyer retains the property.

Early settlement penalties matter more to investors or speculators who buy properties then sell them off quickly to make fast money from Dubai's property market. They would be far more affected by these penalties than those planning to live in their properties long-term.

Buyers are advised therefore to think carefully about how long they intend to hold onto their property when selecting a mortgage.

Terms and conditions check list:• Check the loan-to-value ratio of the loan and whether this will be enough to cover the cost of the property you are buying. If the bank offers a very high loan-to-value ratio check whether this is balanced out by higher interest rates or processing fees.

• If you are buying a home from the secondary market await the bank's own valuation of your property.

• Check what interest rate is being charged. And find out if it is possible to negotiate a better rate with the bank if you are an existing customer or if you transfer your salary to them.

• Work out how long you plan to retain ownership of your property and with this in mind find out what the early settlement penalties are on your mortgage.

• Find out if the mortgage provider will adjust the penalty fee depending on how early on in the tenure of the loan you sell the property or pay off the mortgage.

• Find out what the processing or administrative fees will be and put aside extra money in case hidden costs arise during the application process.

The application process

To apply for a mortgage in the UAE applicants must be aged between 21 and 65 years old and should have been employed for at least three years and sponsored by a company that has been in operation for at least three years. In order to apply for a mortgage you must first have your property reservation approved by the property developers and the management company of the development.

The procedure is for the customer to contact the financing company linked with the property that they wish to take a mortgage for, agree on the financing details, submit all the relevant documentation and sign the paperwork. The application is processed once a 5% holding deposit has been paid.

In order to process a mortgage application the bank requires the following paperwork from the customer: passport and labour card (original and a copy); salary certificate; bank statements for the last six months; letter from the bank confirming there are no outstanding loans owed and a registration form from the developer.

Customers also have the option to seek pre-approval from a mortgage provider before selecting a property. This way they can select a property based on the amount the bank has agreed to lend them which prevents a situation where they register for a property, pay a down payment then find out they are not eligible to receive a mortgage for the value of that property.

Noushad Thotton, mortgage manager at Sherwoods Property Consultants recommend that all customers take this approach.

"You never know whether you are eligible for a mortgage and what factors might stand against you. Even a small matter like a bounced cheque can have a huge impact on your case," he says.

Final diagnosis

Home buyers in Dubai have plenty of choice when it comes to getting mortgages - and with up to 95% financing available - buying a property in the emirate is becoming an affordable reality for many.

But with choosing a mortgage being the biggest financial decision most people will ever make it is essential to pick the right one and to get the process right.

The key to this is to read the small print and to know exactly what to terms and conditions to look out for.

Application check list:• Seek pre-approval from a mortgage provider before looking for a property so you know exactly what your budget is.

• Once your property reservation has been approved by the developer and the management company contact the finance provider to finalise details.

• Check that you have the right paper work and a 5% holding deposit before going to the finance provider to sign the mortgage agreement.

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