Get a Mortgage

Regulated by the Central Bank, the debt-to-burden ratio (DBR) is the ratio of total monthly installments/commitments of credit cards, loans or any other committed monthly repayments to the total income of an individual. In the UAE, the maximum permissible DBR is 50% of an individual’s income, while for pensioners this is 30%. This is one of the main factors when deciding whether a particular applicant is eligible for a loan or not.

Even though all the banks have slightly different rules regarding eligibility criteria while sanctioning, a few things such as the credit score and the debt-to-burden ratio are common aspects that all banks take into account. Ideally, the DBR should be zero; however, in practical cases, it must be kept as low as possible. This was introduced in the UAE not just to keep banks on the safe side by giving out fewer loans but also to help people avoid excessive spending and debt. It is worth noting that Al Etihad Credit Bureau is responsible for calculating the score of individuals, using the information it collects from financial and non-financial institutions in the UAE.

You can easily calculate your DBR by taking the ratio of your outgoings to your monthly income. For instance, if your monthly salary is AED 20K (USD 5.4K) and you have several liabilities that must be attended to every month:

•    Monthly rent: AED 5К (USD 1.3K)
•    Car loan: AED 3K (USD 816)
•    Personal loan installment: AED 1.8K (USD 490)

This means the total debts amount to AED 9.8K (USD 2.7K), which you will need to divide by the amount of your income, which is AED 20K (USD 5.4K). This calculation shows that your DBR amounts to 49%, which means you are eligible to obtain a mortgage. To improve the DBR, clients are advised to make payments on time, avoid bounced cheques, reduce unnecessary debt, and lower outstanding balances.

An Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a lender on a specified date each month. The installments are applied to both the interest and principal each month so that over a specified number of years, the mortgage is paid off entirely. Factors that influence EMI include the amount of the loan taken, the interest rate applied on the loan, the type of rate, and the loan tenure. The concept of EMI allows a borrower to know in advance the amount they have to repay in monthly installments and the interest and principal components.

In cases where you can pay off your mortgage ahead of schedule, you will have to pay 1% of the property value but it cannot exceed AED 10K (USD 2.7K).

Equity release is a term used when a person borrows against the value of their existing property. These funds can be used for any purpose and the interest payable is charged at the current mortgage rates. Most frequently, clients choose the option of equity release when they have to pay off the last installment of an off-plan property. For instance, if a unit was purchased when it was under construction and the handover date is approaching, according to the payment plan, you may need to pay 50% of the property value. If you do not have the necessary amount, you could take a loan from the bank, which covers 80% of the amount because the development has already been completed. After you pay the required 50%, you have 30% left for yourself. These funds can be used for any purpose and any property type.

Before paying your down payment, you should be aware that there are 2 options for getting a mortgage: a fixed/flat rate or a variable rate.

A fixed interest rate, as the term implies, means an interest rate that is calculated on the full amount of the loan throughout its tenure without considering that monthly EMIs gradually reduce the principal amount. For example, if you have obtained a mortgage for AED 1M (USD 272K) with a 4% interest rate for 5 years, you would pay AED 30K (USD 8.1K) every year, which includes a principal repayment of AED 20K (USD 5.4K) and interest of AED 10K (USD 2.7K). In monthly installments, this amounts to AED 2.5K (USD 680) per month. Over the loan tenure, the client would actually be paying a total of AED 150K (USD 41K) in principal plus interest. Thus, the monthly EMI of AED 2.5K (USD 680) converts to an effective interest rate of 17.27% per annum and a total interest payment of AED 50K (USD 13.6K) over 5 years. As you can see, with this method, the borrower has to pay interest on the entire mortgage amount throughout the tenure. Clients typically choose this option for short-term mortgages since the interest component does not decrease, even if you gradually pay the loan off.

Meanwhile, with a variable rate mortgage, the interest you pay is linked to the 1, 3, and 6 month Emirates Interbank Offered Rate (EIBOR) with a fixed percentage added by the bank. This means that the interest you pay can decrease or increase depending on the EIBOR. As of 2021, mortgage interest rates stood at 2.99-5%. For instance, if in month 1 the EIBOR is 2.4% and the fixed margin your bank applies is 1.48%, then the variable rate you will have to pay is 3.88%. If in month 6 the EIBOR increases to 3.4%, then your variable rate will be 4.88%. Variable-rate mortgages tend to be better for medium and long-term mortgages since you can avoid the high reversion rate when your fixed period ends. It is also advantageous as you will be able to benefit from any decreases in either the bank's or the EIBOR rate.

A reduced balance rate means the interest rate is calculated monthly on the outstanding loan amount. Here the EMI includes interest payable for the outstanding loan amount for the month in addition to the principal repayment. After every EMI payment, the outstanding mortgage amount gets reduced, meaning the interest for the next month is calculated only on the outstanding loan amount.

For instance, if you have taken a mortgage for the amount of AED 1M (USD 272К) at a 4% reduced rate for a period of 5 years, the first payment will amount to AED 100K (USD 27.2К), where AED 60K (USD 16.3K) accounts for principal repayment and AED 40K (USD 11K) covers the mortgage interest. Now the loan balance is AED 960K (USD 261K), and you will be charged a 6% rate on this amount, which is approximately AED 38.4K (USD 10.4K). With the payment of AED 100K (USD 27.2K) per annum, the total interest amount will continue to decrease.

When choosing between a fixed and a reduced rate, you should remember that flat interest rates are normally lower than the reduced interest rate; however, it is highly likely that the final paid amount at the reduced rate will be significantly lower compared to the flat rate. As a rule, clients choose reducing rates for loans for over 5 years, since the borrower will pay a lower amount compared to a fixed rate. Meanwhile, flat rates are a great option for consumer loans and for smaller amounts of money.

The LTV ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. For a property purchase price under AED 5M (USD 1.3M), the maximum LTV for an expat is 80% and for a UAE national, this slightly increases to 85%. For properties over AED 5M (USD 1.3M), this decreases to 70% LTV for expats and to 75% for UAE nationals. If it is a subsequent property, then non-UAE nationals get an LTV ratio of 60% irrespective of the property value. For off-plan mortgages, expats get an LTV ratio of 50% irrespective of the property value.

Mortgage life insurance is compulsory in the UAE and can help your dependents pay off your mortgage in the unfortunate event of your death. For most banks, mortgage life insurance is charged monthly and is separate from the loan amount. Some financial institutions increase their interest rate to cover the monthly insurance premium, while some banks will make you pay the policy in advance. Your age, occupation, medical history and country of origin can affect the cost of your life insurance. On a AED 1M (USD 272K) mortgage, life insurance can cost just AED 108 (USD 29) per month.

When applying for a mortgage, obtaining pre-approval is the first step in the mortgage process. This is when the bank reviews your financial situation (including income, assets, and debts) and issues an email or letter stating that they have pre-approved your application and will lend you the requested sum. The pre-approval is usually valid for 60 days.

Important! Besides the above-mentioned payment methods, there are also capital and interest mortgages and interest-only loans, but it is better to consult with a real estate broker to find out more about them.

Remortgaging is when you replace an existing loan with a new one, either with a current lender or with a new one who will buy out your existing debt. There are 3 main factors that will help you decide if it is worth remortgaging your home: the costs of remortgaging, the headline interest rate of your existing and new mortgage, and any exit penalties you will have to pay.