The Professionals' Guide to Home Loan & Mortgage in UAE

By Sakshi Srivastav - 29 May 2021 Last Updated: 20 Sep 2021
The Professionals' Guide to Home Loan & Mortgage in UAE

Many people dream of purchasing real estate, but the process can be lengthy and complicated from start to finish. It becomes a lengthy and arduous process as people look for the right apartment or villas, complete paperwork, visit several places, and attend meetings. Local and international investors have shown an increased interest in property investments in Dubai real estate. Along with it, there is a market for home loans. There are various types of mortgages available in Dubai, and making the right choice is critical.

Knowing what type of mortgage, you want and how many types of mortgages are available in UAE that meet your needs is the first and most important step in choosing the right bank for a mortgage loan. Various forms of mortgages are offered by financial institutions, and borrowers choose one based on their preferences and eligibility. If you're having trouble deciding between the various forms of mortgages and which one is right for you, we've got you covered.

Introduction to Mortgages

In its most basic form, a mortgage is a loan you take out from a bank or person that gives them the right to seize your home if you don't repay the money you lent, plus interest. When buying a home, several people take out a mortgage.

Central Bank of the United Arab Emirates

The interest rates are set by the UAE Central Bank. Every business day, banks send their rates to the central bank, which subtracts the highest and lowest rates and averages the rest. Every day at 11 a.m., they will publish the rate on their website.

Where do banks get their rates?

The Emirates Interbank Offered Rate (EIBOR) is related to certain banks, which is why banks and lenders have different rates. These are the rates that banks charge each other when they borrow money. The EIBOR is a group of 10 to 12 banks whose task it is to keep these rates stable by controlling them. However, rates can fluctuate as a result of changes in oil prices or market liquidity. Rates increase when liquidity is scarce, and rates fall when deposits rise.

Mortgages Available in the United Arab Emirates

There are many types of mortgages available, depending on your needs and circumstances. The above-mentioned factors, as well as others such as the number, period, and form of mortgage, influence interest rates.

Mortgages Available in the United Arab Emirates

Fixed Rate Mortgage

In a fixed-rate mortgage, the interest rate is set before the loan term begins. This rate does not change over the pre-agreed period, which is usually less than five years. There are obvious incentives in this system, but to understand all of the available mortgage types in Dubai, it's helpful to study the market or seek expert advice, since a fixed-rate mortgage isn't always the best option if rates are falling. You'd be stuck with the original rate if the market situation changed and rates fell. In the event that rates rise, the fixed-lower-rate will be advantageous. The interest rate will not change regardless of how the economy changes.

Fixed-rate mortgages have several benefits, including the following:

  1. Borrowers with fixed-rate mortgages will create a straightforward budget because the interest rate will remain constant over the duration of the loan.
  2. Even if mortgage rates increase in the future, homeowners will not be affected because they have locked in a fixed rate of interest.
  3. The borrowers know how much they will have to pay each month in advance.

Floating Interest Rates or Variable Interest Rates

The interest rate on a variable interest rate mortgage will change over time depending on market conditions. You might end up with a good deal or even pay a higher rate of return if market conditions dictate. Your rate could go up or down drastically at any moment, depending on the demand. As a result, if you apply for this type of loan, make sure you have enough financial liquidity to handle any increase in repayments.

Capped Mortgage

A capped mortgage is a choice for people who are concerned about their rates rising to an unaffordable level but still want a floating interest mortgage. Other than fixed rates, capped mortgages are the only rate forms that provide payment security. The capped mortgage was implemented as an exclusive offer for a limited time, and it is determined by the fact that a maximum rate is set before the loan duration begins. If the market rises above that level, you will be unaffected; but, if the market falls, you will profit. Regardless of the market, the monthly instalment will not exceed the predetermined cap.

Offset Mortgage

An offset mortgage is created when a traditional mortgage is paired with one or more savings accounts at the same financial institution. This is a new concept that only a few lenders in the UAE offer. Under an offset mortgage, borrowers can connect their savings account, current account, credit card account, and loan account. When funds are charged on each of the accounts, the debt's value is reduced by an offset equal to the amount credited. As a result, by offsetting the sum on a regular basis, you will be able to pay a lower interest rate in the long run.

Remortgage

A Remortgage is a loan taken out on an existing mortgage, or, to put it another way, a switch to a new lender. In the UAE, it's known as a balance shift. This new loan can be offered by the same lender, or you can look for a new one. Individuals sometimes apply for a Remortgage because they need additional funds, even though the interest rate on the original loan is low. You'll have more mortgage options if your loan-to-value (LTV) is lower. Divide your remaining mortgage balance by the market value of your home to find your LTV.

Mortgage with a Discounted Rate

Obtaining a discounted rate mortgage could be the best choice among the various types of mortgages available in Dubai in some cases. Since financial assistance is given on the borrower's variable interest rate, the borrower pays a lower sum. This cut, however, is only temporary. You'll be paying a variable rate in the long run.

Conclusion

Purchasing a home is indeed a pleasurable experience, but it is only enhanced if it is well-planned and completed on time. It's critical that you find out which financial product is right for you, since a Home Loan can have a significant financial effect long after it's signed. As a result, we hope that this article has helped you get one step closer to making your final decision.

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