Mortgage Vs Payment Plan: Compare and Contrast

Mortgage VS. Payment Plan
Buying Property Via Mortgage
Property Investment With a Payment Plan
Factors to Consider
FAQs

When purchasing a property, you’ll likely encounter two primary financing options: mortgages and payment plans. Each has unique characteristics, making it essential to understand the key differences to make an informed decision. The differences between a mortgage vs payment plan are dependent on various factors, including your financial situation, property type and lenders’ or developers’ terms and conditions.

Keep reading this guide to understand the difference between mortgages and payment plans.

Overview of Mortgage Vs Payment Plan

The difference between mortgages and payment plans might seem minor to some, but it has a lasting impact. A mortgage is a loan to purchase a property, typically with monthly payments over many years. It’s a long-term financing option, allowing you to build equity in the property.

On the other hand, a payment plan is a structured arrangement to pay the cost of your property, often with smaller, more frequent payments. Developers offer payment plans for real estate purchases and usually have shorter repayment terms than mortgages.

But let’s look at the payment plan vs mortgage debate more closely and how to make the right choice.

Mortgage

When buying a home, borrowers can choose different mortgage options depending on their financial situation and needs. However, understanding the types of mortgage plans can be challenging, as they vary in terms of interest rates, repayment terms and overall costs.

For example, a 25-year fixed-rate mortgage may have a lower interest rate than a 15-year fixed-rate mortgage, but it will result in higher total payments over time.

Nevertheless, it’s essential to consider alternative financing methods. So, are there any other ways to finance a home purchase besides traditional mortgages?

Payment Plan

Real estate developers offer payment plans to make properties more attractive to buyers. Developers may use payment plans to increase sales or compete with other developers. These plans can benefit both the developer and the borrower.

While payment plans can increase sales and cash flow for developers, borrowers can use this method for lower down payment and a shorter repayment period, typically between two and ten years.

However, shorter payment terms don’t always mean easier payments. Many payment plans require a 10% down payment, followed by another 10% within a year, with the remaining balance spread out over monthly instalments.

Buying Property Through Mortgage or Home Loan

When choosing between a payment plan and a mortgage, it’s helpful to understand the application process for each.

For instance, mortgage loans from UAE banks are approved under specific requirements such as meeting minimum salary, employment status and necessary documentation. Once you submit your documents, the bank will review and verify them.

Pro tip – keeping track of the minimum salary to get a mortgage in Dubai or other emirates can make the process easier.

After approval, you must register the mortgage with the Dubai Land Department (DLD). This is essential for buying property in Dubai and requires specific documents and fees. You’ll need to pay 0.25% of the mortgage value and other costs.

The last step involves getting the title deed, for which you’ll also pay AED 250. Additional fees include AED 4,000+VAT and AED 5,000+VAT for service partners and initial sale registration.

Mortgage vs Payment Plan - making the right choice — *Keeping all your documents updated and ready is the key to a successful mortgage application*

Highlights:

You own the property immediately.
The UAE Central Bank ensures fair practices.
Banks offer various mortgage types.
First-time buyers can borrow up to 80% (expatriates) or 85% (UAE nationals).
Dubai has no property tax, but other fees exist.
Mortgages can last up to 25 years.
You must have a valid residence visa.

These factors can help you decide whether a mortgage or payment plan is better. Let’s explore the payment plan process next.

Investing in a Property Via Payment Plan

Understanding the payment plan for off-plan properties in the UAE involves going into its technicalities. The process typically consists of two phases: pre-handover and post-handover. During construction, investors make payments in installments. However, once the project is completed, the remaining balance is due.

Similarly, you can find off-plan properties that offer a flexible post-handover payment plan. In this case, a specific % of payment is due over the course of 2 or 5 years after the project is handed over (depending on the developer).

Off-plan investors must know about the legal aspects surrounding property handover in the UAE. Knowledge of different scenarios and technicalities can help mitigate potential risks.

The payment plan is often divided into specific ratios. A 40/60 ratio means 40% of payment is due before the handover (including a 20% down payment), and 60% must be paid in instalments after receiving the keys. However, this division can vary depending on the developer and governing authorities.

Project delays can sometimes occur, causing inconvenience to buyers. Staying informed about the project’s progress is essential for effectively managing any delays that may arise.

Compare mortgage with payment plan — *Payment plans take out the financial burden of a hefty down payment*

Highlights:

Pay a certain percentage of the property value each month and avoid the financial strain of a large down payment.
No interest charges or hidden fees associated with a payment plan.
Pay as your property is built, which provides security and transparency.
A payment plan is available for a wide range of properties.
Many developers offer additional incentives like waived registration fees or free service charges.

Making the Right Choice

Now that you know how to ‘compare mortgage with payment plan’, it’s time to know that choosing either a payment plan or a mortgage hinges on several factors.

Your financial stability plays a crucial role. For example, a mortgage might be a suitable choice if you have a consistent income and can afford a down payment. With a payment plan, you would have to pay the entire cost of the property in a shorter time.
Your long-term property goals are also essential to consider. A mortgage can help you build equity over time if you plan to stay in the property for an extended period. Conversely, a payment plan provides more flexibility if your plans are less certain.
Market conditions, including interest rates, should also be evaluated. Favourable interest rates can make a mortgage more appealing. In contrast, higher interest rates might make a payment plan a more attractive option.

Both financing options have their advantages and disadvantages. Understanding the differences between mortgages and payment plans is crucial.

Carefully assess your financial situation, long-term goals and market conditions. Furthermore, seeking advice from a financial advisor or real estate expert can provide valuable insights to help you choose the most suitable financing option for your property purchase.

Understanding Payment Plan vs Mortgage — *When buying a property in the UAE, always weigh your financing methods*

FAQs

What is a loan-to-value ratio?

The loan-to-value (LTV) ratio represents the portion of a property’s value that you borrow through a mortgage. For example, an LTV of 70% means you’ve put down 30% of the property’s price and are financing the remaining 70%.

Is it possible to purchase a property in Dubai without a down payment?

In Dubai, residents can finance up to 85% of the property’s value, while expatriates are typically limited to 80%. Non-residents have the most restricted options, with LTV ratios ranging from 50% to 80%. So, generally, a down payment is required.

If you are living abroad and want to purchase a property in the city, our guide to mortgage in Dubai for non-residents can be handy.

What is a mortgage plan?

In real estate, a mortgage is a loan secured by property. If the borrower defaults on payments, the lender can take possession of the property. Understanding the different types of mortgages in Dubai and other emirates is crucial to protect your investment.

Should I buy a property on a 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.

Which option is better for long-term property investment in the UAE?

Mortgages can be a good choice for long-term real estate investments due to the potential for property value appreciation. On the other hand, a payment plan might be more suitable for short-term holding strategies or for those who plan to move frequently.

And this brings us to the end of the mortgage vs payment plan guide. If you want to benefit from the booming real estate industry, here are Dubai’s best areas for property investment. Similarly, our folks in the capital city can look closer at the top off-plan projects in Abu Dhabi for lucrative investments!

Moreover, if you still think a mortgage is the better option, check out these tips to ensure your mortgage application gets approved – the future belongs to those who prepare for it today!

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What’s the difference between mortgages and payment plans?