Buying a home is more than just a purchase, it is a journey that involves different emotions. We all have our own perceptions of a dream home and the kind of security and lifestyle it provides for us and our families.
While we spend a lot of time fantasizing about what our dream home might be like, we often get carried away and tend to postpone the more tedious but equally important part, which is deciding on financing and payment options.
Home Financing Options in the UAE:
When it comes to buying a property in the UAE, most people consider a mortgage loan for many reasons. The most common reason is that most people prefer not to or are unable to pay off the entire cost of a house or property all at once. Instead, most people would rather spread the payments into instalments that extend over several years. That is why it is necessary for everyone who’s planning to buy a property to have basic knowledge about mortgage loans and the types of mortgages available in the UAE.
What is a mortgage loan?
Before we start talking about the types of mortgages, let’s first answer the question: what is a mortgage loan?
A mortgage is a type of loan that's used to finance properties. Mortgages are “secured” loans, where the property being financed is offered as collateral to the lender if loan conditions are not met - defaults in payment, etc.
Types of mortgages available in the UAE:
1. Fixed Rate Mortgage
Fixed Rate Mortgage loans offer a fixed interest charge on all the payments to repay the mortgage. The tenor or the loan repayment period for a fixed rate mortgage is usually shorter than five years. One of the advantages of this type of mortgage is the stability it provides while ensuring that you have accurate knowledge of the total amount you have to repay at the end of the loan term, including the original value of the loan also known as the principal in addition to the interest amount.
Some may see this type of mortgage as a safe choice due to the clarity they offer regarding the required payments throughout the life of the loan from the first to the last installment. However, this clarity, despite its advantages, deprives you of the opportunity to benefit from paying a lower interest rate if the rates drop in the future.
If the interest rates at the time of obtaining the loan are relatively high or are expected to decrease in the future, then the option to obtain a fixed rate mortgage will not be the best for you. In any case, it is useful to seek the help of a mortgage broker or an expert consultant to better understand market trends when you apply for a mortgage loan.
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2. Variable interest mortgage
When it comes to a variable interest mortgage, the interest paid on the total remaining amount depends on the current interest rate at the time an installment is due. The interest of a variable-rate mortgage is not a fixed value, but rather a percentage that may increase or decrease according to the change in the prevailing interest rate according to The Emirates Interbank Offered Rate “EIBOR”.
The positive side of this type of mortgage is that you can take advantage of lower interest rates if they occur. This also applies to an increase in interest rates, which is an aspect of risk that must be taken into account when considering this type of loan. In general, people resort to this type of loan when the interest rates at the time of obtaining the loan are higher than usual or are expected to drop in the future.
3. Remortgage
This mortgage option is available when you decide to transfer your existing loan to a new bank or financial institution. For example, let's say you take out a mortgage to buy your home, and find a financing plan more suitable for your circumstances, offered by another bank; you can then remortgage your home on specific terms.
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4. Capped mortgage
What distinguishes this type of mortgage is the fixed maximum limit of which the rate to be applied to your mortgage increases to. Although it is a variable rate loan, the interest rate on your mortgage is capped at a percentage that cannot be exceeded when there is an increase in the bank’s interest rates at any point in time. The capped rate is agreed upon at the time of acquiring your loan.
5. Offset mortgage
An offset mortgage is a type of loan that links one or more of your savings accounts to your loan account. The money in your savings will reduce the principal component of your mortgage meaning you'll end up paying less interest in the long run.
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In conclusion
Make sure that you have enough information about all the mortgage loan options available in the market and suitable for you, before you obtain one, read the terms & conditions of the loan agreement thoroughly and consult a mortgage specialist to get a clearer idea on which mortgage option would be most appropriate for you and to avoid any surprises in the future.
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