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Sun 31 Jan 2010 11:32 AM

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Revealed: the full cost of a UAE mortgage

Research shows homebuyers will owe more than AED4m on AED2m mortgage.

The final cost of a UAE mortage is now running as high as 143 percent of the original value of the loan, acccording to latest available figures.

Current interest rates in Dubai range from 6.5 to 8.5 percent, depending on the finance type, the lender, the project and the down payment. It means that buyers taking out a AED2m mortgage over 25 years are likely to pay between AED4,079,244.31 and AED4,864,363.90 overall, when interest payments and other costs are added.

Current UAE interest rates are nearly double those of many other countries - Australia currently has a rate of 3.75 percent, China is at 5.31 percent, India is at 4.75 percent and Canada and the US are as low as 0.25 percent.

According to Independent Finance, a consultancy which advises UAE buyers on mortgages, the five most active lenders are Mashreq bank, Dubai Islamic Bank, Abu Dhabi Commercial Bank, RAKbank and Standard Chartered and average monthly repayments range from AED13,504.14 to AED16,104.54.

The interest repayments decrease as the repayment schedule progresses. However, during the first week of a 25 year payment schedule - which has an interest rate of 7.5 percent - the interest repayment on a AED2m mortgage makes up nearly 85 percent of the total monthly repayment due.

By the half way stage and week 150 the interest repayment will make up 60 percent and by the last and final repayment the interest only accounts for 0.6 percent.

If mortgage holders reduce the lending period to 15 years the monthly repayments on the above mortgage increase by 25 percent - or AED3,760.43 - to AED18,540.25 and the saving overall is as much as 45 percent, compared to paying over 25 years.

However, most lenders have an early settlement fee of up to two percent if mortgage holders decide to repay the loan early and up to five percent if another bank decides to buyout the mortgage.

Other standard costs involved in the mortgage include: bank process fees, which are up to 1.25 percent of the loan amount, a valuation fee of up to AED3,000 and a mortgage registration fee, which amounts to around 0.25 percent of the loan amount.

Earlier this month, Arabian Business revealed that up to 40 percent of buyers in Dubai, who have been pre-approved by lenders for mortgages, subsequently decide not to buy a property.

“It is quite a lot of our clients who get pre-approvals who do not go ahead with it,” a consultant at Independent Finance said.

The main reason for the cancellation of deals, according to the consultant said, was that documents often take two to three months to come from developers and the buyers then look at the market and change their mind about pursuing the deal.

“They have seen the prices drop and see a change in the market and decide no.”

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DG 10 years ago

Apart from the excessive contracted mortgage pricing some UAE banks are also using the small print in contracts to charge whatever they feel like. The do this by inventing their own base rate instead of EIBOR and linking the pricing at will to this new base rate.. What is perplexing is that the central bank is permitting them to get away with this. In January banks have recovered these much larger installments adding to the pain that is already being experienced by mortage clients and sending their cashflow projections into a tailspin. It is simply unfair that the pain should always be passed onto the mortgage holder especially when they is way beyond even the high rates they were told they would pay when entering into the contract. The UAE needs a banking omnbudsman to represent consumer rights. They should not have to enter class action suits against huge financial institutions who may be legally protected but perhaps not morally protected. The world can only come out of its problems if everyone takes it share of the pain and does the thing that is morally correct.

His Excellency Dr Paul 10 years ago

The UAE market has foreign and local lenders, so there is real competition (unlike in some parts of the UAE economy). The fact that no banks are willing to lend for lower rates probably points to the conclusion - that the higher rates charged reflect the risk profile of the typical UAE mortgage. Remember that UAE prices have been very volatile, and many banks are probably holding a large number of 'underwater' mortgages (where the outstanding loan amount is worth more than the property it is secured on). Add to this the fact that most mortgage holders are foreigners with little to tie them to the country, and it really does not seem that surprising that banks would seek higher rates than in many other countries.

JLD 10 years ago

Can't believe this article was published! This is not news, just simple mathematics.

Harry winston 10 years ago

Dr. paul. Totallly disagree wth you. Genuine mortgage holders should not be penalised because of risky investments which didnt work out. Morever the heads of Finance in these institutions were 30 year old nobodies with no past significant experience. They made the mistakes and they have to pay for it. Dont pass the buck on genuine investors and use the lack of laws in the UAE to get away with these rate changes

Original Joe 10 years ago

Your article mentions interest rates in the U.S. as low as .25% but this is not the interest rate for mortgages which are around 4.5% to 5.5% depending on the bank and the number of years for financing. I agree the UAE rates are excessively high but they were high before the market downturn and before everyone became somewhat cautious about the UAE real estate market and the possibility of further declines in home value. But what you have now in the market is opportunitistic lenders like Al Hilal Bank who are charging more than 9% for those who qualify and are willing to pay these loan shark rates. Al Hilal is relatively new so they probably do not have many if any under water mortgages on their books. They are cashing in on the crash itself and the fact that other lenders have become very cautious. These loan shark rates are not good for the long term growth of the mortgage market.

Sonny 10 years ago

What next? Revealed! The real cost of credit card borrowing. ?; Revealed: The real cost of buying a car. ? ... Have you just discovered an amorization chart of something? It's so unfair. Sob. But it's hardly a scoop.

Too Much Fluce 10 years ago

Why limit this study to just Dubai. The interest rate charges are over the top in Doha as well and then there are loads of “hidden charges” that were not explained by the so called “mortgage expert” at the time of signing. I’m with Doha Bank and their variable rate is 9.5% and they are announcing huge profits. The interesting thing is that I have a car loan and it attracts a lower interest rate than 9.5%. All the banks are charging a similar rate so it’s not as if as a consumer you can shop around for a better deal or take your business elsewhere. They want to get the housing market moving, but they are charging such high interest rates it makes it almost impossible to buy a unit, even if you wanted to. Where else in the world is the interest rate for a car loan cheaper than a home loan.

JLD Home Matters 10 years ago

I am an independent mortgage provider and can confirm that the market is improving, in terms of banks lowering rates and increasing Loan to Value ratios. This time last year, we had average interest rates of 8-8.5% and 1 bank providing 80% LTV. A year on, average rates are 7%, with best sub 7% and there are 4 banks offering 80% LTV.

Farhad 10 years ago

In my point of view as somebody who has bought his property in the worst time, 8 %interest is really unfair, because my loan installment is around 9000 AED , while if I wanna rent the same property it is at most 4500 AED ! , If banks reduce their intrest at least to range of 5 to 6 % owners would be able to pay back their dues easier ( even in case losing their job) and new buyers also would be motivated to invest and rent it in the market.

Mike Charles 10 years ago

Hidden interest not revealed! NBD sent me an interest advise on 1.1.2009 stating that the applicable interest rate would be 7.11%. In reality they charged me well in excess of 8% or Dhs 22,000 over and above for a period of 6 mths. I only realized this after I calculated and compared their interest debits. All EmiratesNBD customers beware of such tricks adopted by this bank and ensure you check your statements. The bank now tell me that they have the right to change any terms and conditions of the loan at any time, without advice to the customer. This in itself contravenes another clause in the terms and conditions. Yes DG you are right. UAE needs a Banking Omnbudsman.