Comprehensive guide to the types of mortgages in Dubai
Buying a dream home is one of the most exciting things you can do in life. As you can guess, purchasing a perfect property in Dubai involves many steps, including browsing online listings, meeting agents, talking with friends and family, visiting the site physically, and making a final decision. After you’ve picked the right house, it’s time to check out the types of mortgages available in Dubai.
So, next up is an overview of mortgage in Dubai, including types, repayment options and related terms that you should be familiar with.
TYPES OF MORTGAGES LOANS IN DUBAI
- Fixed-rate Mortgage
- Variable rate Mortgage
- Remortgage
- Off-set Mortgage
- Investment Mortgage
- Non-resident Mortgage
Potential homeowners can choose from different mortgage types in Dubai. Given that it is a long-term commitment, you must understand the pros and cons of each offer before selecting the one that best suits your needs.
Here are the types of mortgage loans in Dubai you can opt for.
FIXED-RATE MORTGAGE
As the name suggests, the interest rate in a fixed-rate mortgage is set before the loan term’s onset. This rate doesn’t change throughout the pre-agreed period, which generally is less than five years. However, you might be lucky to find a lender offering a full loan repayment period at a fixed rate.
There are clear advantages for the borrower in this system. First, it’s easier to plan your financial outlay for many years, at least. If the market situation changes and interest rates go downward, you will be stuck with the original rate. However, if the rates go higher, you’ll be at an advantage with your fixed-lower rate.
As a borrower, you must study the market or seek expert help to understand mortgage types in Dubai. If rates are likely to drop soon, signing up for a fixed-rate mortgage isn’t the best option.
VARIABLE RATE MORTGAGE
Next on our list of kinds of mortgage in Dubai is variable rate mortgage. Depending on market conditions, the interest rate for variable or adjustable interest rate mortgages can change throughout the repayment period. Borrowers can get a lucrative deal or pay a higher rate of return, depending on the situation.
If you opt for this type of loan, ensure you have the financial liquidity to handle any increase in repayments. Adjustable-rate mortgages are further subdivided into two categories.
DISCOUNTED RATE MORTGAGE
In some cases, getting a discounted-rate mortgage can be the best option among the different types of mortgages in Dubai. Interest rates are lower than the Emirates Interbank Offered Rate (EIBOR), and the offer is generally reserved for first-time buyers.
For instance, if the lender’s interest rate stands at 4%, you will receive a discount of 1%. Your interest rate, hence, is 3%. However, if the lender’s base rate rises to 5%, your interest rate will increase too. But if you are lucky and the base interest rate drops, you will likely benefit.
A discounted rate is generally applied for a two-to-five-year period. After this time, your payment will depend on the lender’s base variable rate. However, “lifetime” discount mortgages are also available at times.
If your loan is repaid before the loan term, you may be required to pay an early repayment charge. This is probably among the best types of mortgage loans for first-time home buyers in Dubai.
CAPPED MORTGAGE
You will find capped mortgages among the different types of home mortgages, where the borrower has some advantage. You will make payments at a variable rate, but a maximum cap is set before the loan term begins. Often, the capped period can be for a limited time. The interest rates can increase depending on the market conditions, but a limit is applied beyond which the rate will not increase.
This allows you to do some financial planning, at least initially. However, you will pay extra with capped mortgage rates rather than discounted ones.
REMORTGAGE
You can get a new loan on an existing mortgage or even transfer the existing mortgage with a remortgage. Interestingly, the same lender can offer this new loan, or you can find a new one. Even when the interest rate is low on the initial loan, people opt for a remortgage in Dubai as they need additional funds for other uses.
Most people opt for remortgages in Dubai for a lower interest rate or a longer payment. A closing fee is required when remortgaging. It is the most commonly used type of mortgage product.
OFFSET MORTGAGE
An offset mortgage involves linking a traditional mortgage with one or more deposit accounts. Borrowers can link their savings/current/credit card and the loan account under an offset mortgage, and the more money they have in their account, the less interest they have to pay.
You can access the money from the linked account. However, if you opt for conventional overpayments, the money will be directly transferred to your lender.
The offset mortgage interest rate is slightly higher than conventional mortgage plans. Plus, you may have to pay an annual fee at the end of the year. Hence, there are some financial aspects that you may have to consider when choosing this type of mortgage in Dubai.
INVESTMENT MORTGAGE
A loan acquired to buy a property for investment is known as an investment mortgage. The goal is to generate a new revenue stream by renting out the property and getting work done or reselling it. In this case, a multi-unit building with two to four units or a single-family home is considered. Buildings with five or more units are considered commercial real estate, and different rules apply to such properties.
You can find many popular investment areas in Dubai. You can buy apartments or villas in a neighbourhood that best suits your needs.
NON-RESIDENT MORTGAGE
As the name suggests, among the types of mortgage, this one is available for non-residents of the UAE. Such mortgages are approved for customers who match the following criteria.
- Only citizens of a country part of the approved list of financial institutions can apply.
- Salaried or self-employed.
- Have a minimum monthly income (after tax deductions) as the bank defines.
In such cases, banks generally only finance up to 50% of the property. Moreover, the loan term is short, and monthly payments are higher.
For further details, you can take a look at our guide to non-resident mortgages in Dubai.
MORTGAGE BY PROPERTY TYPE
Different types of mortgage loans in Dubai are also categorised according to property types.
RESIDENTIAL MORTGAGE
A residential mortgage is a loan acquired by an individual to buy a home to live in. This property cannot be rented out or used for commercial purposes. You can choose between a variable or fixed interest rate for a residential mortgage.
Once you have paid off the mortgage, you will fully own the property. Typically, these types of mortgages in Dubai are long-term. You can also apply for a remortgage.
COMMERCIAL MORTGAGE
A commercial mortgage is a tool business owners use to buy a property for their business operations. This property will not be your primary address. Instead, it will be a company asset. Typically, a commercial mortgage has a lower interest rate than a business loan. The property you purchase is used as collateral.
Substantial deposits are initially paid to the lender. So, you must determine whether you can withdraw money from the business without any negative impact.
LAND/CONSTRUCTION MORTGAGE
Among the widely used types of mortgages in Dubai is a land/construction mortgage. A loan is secured to fund the land purchase, structure renovation or construction. With this mortgage, you receive the money required in advance for each part of the project. Also, remember that this is a time-consuming process, and the loan does not cover the design phase. So, the initial investment is yours.
MORTGAGE REPAYMENT OPTIONS
There are different mortgage repayment options. Borrowers often use a combination of options to pay back their loan, as per the agreement with the bank.
INTEREST-ONLY REPAYMENTS
Generally seen with off-plan properties and offered for a maximum of five years, interest-only repayments see you pay just the interest on your loan—not the capital. You can repay the capital together or remortgage your loan at the end of your term.
CAPITAL AND INTEREST REPAYMENTS
This is the most popular type of repayment, where the borrower pays the EMI that covers the capital and the interest each month over a pre-agreed time frame.
Typically, the initial years of the loan period will have a higher interest rate. However, the interest rate decreases in subsequent years, and the money goes towards the actual loan increase. It is common practice in the UAE for mortgage repayment periods to be up to 25 years or until 65 years for salaried expats or until 70 years of age for UAE nationals and self-employed expats – depending on whichever comes sooner.
DOWN PAYMENT
Your initial deposit will vary depending on the bank, mortgage broker, and loan type you choose. Usually, if you are an expat purchasing a property for personal use, your down payment will be 20% to 35% of the property value. However, off-plan properties can require a larger down payment. Check out our tips on how to save money for a down payment. There is also a minimum salary requirement for home loans that you must meet to be eligible.
MORTGAGE LIFE INSURANCE
This insurance covers your mortgage repayments in the unfortunate case of a borrower’s demise. This insurance gives borrowers peace of mind should they have dependents who plan on residing in the mortgaged asset after the borrower’s death but can’t make the payments. Protection is also offered to those with disabilities and terminal illnesses.
FAQS ABOUT TYPES OF HOME MORTGAGES
IS IT DIFFICULT TO GET A MORTGAGE IN DUBAI?
Getting a mortgage in Dubai can vary in difficulty depending on several factors. Generally, Dubai has a well-established mortgage market and many banks and financial institutions offer loans. Just make sure that you have the right documentation and familiarise yourself with the requirements before applying for the mortgage.
HOW MUCH OF A DOWN PAYMENT DO I NEED TO BUY A HOUSE IN DUBAI?
To buy a home in Dubai, you must typically pay around 15% to 25% of the property value as a down payment. UAE nationals often need to put down around 15% to 20%, while expatriates usually need to provide 20% -25%. This percentage can vary based on the bank’s policies, the property type and other factors.
WHICH BANKS IN DUBAI OFFER MORTGAGE LOAN?
Emirates NBD, Emirates Islamic Bank and Mashreq Bank are some major banks offering mortgage loans. Here’s how you can get a mortgage loan from UAE banks.
HOW LONG DOES IT TAKE TO GET A MORTGAGE APPROVED IN DUBAI?
Mortgage approval in Dubai generally takes between 2 to 6 weeks. This timeline includes several steps, such as documentation review, property valuation and final approval. The exact duration can vary depending on the lender’s efficiency, the complexity of your application and the required documents.
SHOULD I BUY A PROPERTY ON MORTGAGE OR SETTLE FOR CASH PAYMENTS?
Most people buy property on a mortgage, but some prefer to go ahead with a cash payment. Here’s our guide to buying a property in cash vs mortgage for anyone deciding between the two options.
HOW CAN I GET A MORTGAGE IN DUBAI?
Before applying for a mortgage, getting a bank mortgage pre-approval in Dubai is essential to learn more about the maximum amount of housing finance you qualify for.
Here’s some expert advice on how to get a mortgage loan in Dubai. Take your time to evaluate the different mortgage types before signing a document. Eventually, it is about getting yourself the best deal.
Bayut has partnered with ADCB to provide instant pre-approvals online in Dubai and other parts of the UAE through the ADCB Dream Home Platform.
WHAT ARE EQUATED MONTHLY INSTALLMENTS (EMI)?
The most important term on this list, your EMI, is how much you must pay back each month on a particular date. Your EMI covers your interest and principal loan amount over a fixed period until you’ve entirely paid off the loan.
WHAT IS A LOAN TO VALUE RATIO (LTV)?
Commonly known as the LTV, this is how much you borrow in relation to the actual real estate asset. For example, if your LTV is 70%, you have made a down payment of 30% of the property price and will be taking out a loan of 70%.
WHAT IS AN EARLY REPAYMENT CHARGE (ERC)?
You will be charged a fee or penalty if you want to repay your loan before the agreed date. This fee or penalty will be based on whether you have a fixed or variable mortgage. For further clarity on the type of interest plan, you can read more about the benefits of flat vs. reduced interest rates.
This brings us to the end of our guide to mortgage types in Dubai. Home loans in Dubai are also an option. Different types of mortgage loans are available in Dubai. With some due diligence, you can find the right model that works for you.
Learning more about common real estate terms can be helpful if you’re interested in buying a home. We have also answered FAQs by first-time home buyers in Dubai.
