Buying a house is the biggest financial purchase for most people. Also, considering the costs of living and the property prices, a mortgage is unavoidable. In the UAE, when it comes to mortgages, home buyers are spoilt for choice. Most financial institutions offer various types of mortgages to cater to the needs of different kinds of borrowers. But, with more choice comes a great responsibility – of choosing the right type of mortgage. And, to be able to do so, you need to first understand the different types of mortgages available to you. So, without wasting any time, let’s take a quick look at some common mortgage types in the UAE:
This is the oldest and the most popular type of mortgage. In a fixed-rate mortgage, the interest rate charged does not change throughout the tenure of the loan. Before approving the loan, the rate of interest is communicated to the borrower by the financial institution. In a traditional fixed-rate mortgage (which is still being offered by some institutions), the rate fixed during the approval process does not change for the entire loan period. However, some lenders offer a fixed-rate mortgage for a pre-specified period and then shift to the variable rate (EIBOR – Emirates InterBank Offered Rate).
Unlike the fixed-rate mortgage, in a variable-rate mortgage, the interest rate on your loan changes regularly. These changes are based on the increase or decrease in EIBOR and are implemented on a quarterly basis. Usually, in a variable-rate mortgage, the rate of interest is lower than the fixed-rate mortgage.
In simpler words, in a variable-rate mortgage, your monthly payment should increase when the EIBOR increases and decrease when it goes down. Therefore, before selecting the variable-rate mortgage, you must ensure that you are prepared to deal with varying monthly expenses.
Sometimes, financial institutions offer a discount on the standard variable rates to attract borrowers. These discounts are usually a small portion of the interest rate. Also, the discount is offered only for a limited period of time, after which, the standard variable rates are applicable. While many borrowers tend to opt for the discounted-rate mortgage, they should keep in mind that the discount is only for a specific period of time. They should compare all other aspects too.
A capped mortgage is a variant of the variable-rate mortgage. In the standard variable rate mortgages, borrowers are worried about the interest rates rising too high. Also, the regular up-and-down movement of the EIBOR can be stressful to the borrowers since they might need to re-adjust their monthly costs once every three months. In a capped mortgage, the lending institution sets a maximum limit up to which the interest rate can rise. If the EIBOR rises beyond the limit, there will be no effect on the mortgage rate. Usually, these limits are reasonably high to cover for basic fluctuations in rates. As a borrower, if you are not comfortable with changing rates, then looking for a good deal on fixed-rate mortgages might be a good idea.
Also Read: Dubai’s New Mortgage Law
In an offset mortgage, your savings/current account is linked to your loan account allowing you to use your savings to decrease the interest paid on the mortgage. In a regular mortgage, the interest is calculated based on the total loan amount. However, with an offset mortgage, the interest is calculated as follows:
- You deposit your savings into your bank account linked to the mortgage
- Every day, the bank calculates the interest based on the difference between the loan balance and the funds in your account.
For example, let’s say that you have a loan of Dh 500,000 and deposit Dh 100,000 into your account linked with the mortgage. The day the funds are deposited, the interest will be calculated on a loan amount of Dh 400,000 (500,000 – 100,000). You can use your savings/current account normally and deposit or withdraw funds as required. At the end of the day, the bank would calculate the interest applicable on your loan as explained above.
It is important to understand that the offset mortgages only reduce the interest component of the loan. Also, some lenders even allow borrowers to connect their credit cards and other loan accounts into a single account. However, offset mortgage are new to the UAE and the market is yet to evolve.
Re-mortgage or Balance Transfer
If you have already taken a mortgage loan and are in need of additional funds, then you can opt for a balance transfer or a re-mortgage loan. You can get a loan on your existing loan or transfer your existing mortgage to another lender and avail a higher loan amount. Apart from the need for more funds, some borrowers also opt for a balance transfer if the new loan is available at lower interest rates as compared to their existing loan.
Buying a home requires planning and efficient management of finances. The tenure of a home mortgage is usually longer than any other loan. Therefore it is important that you choose the right type of mortgage before availing the loan. Once you decide on the type of mortgage that you would like to opt for, research the market and look at institutions who offer it. Compare aspects like the interest rate, maximum tenure, loan amount, down payment requirement, processing fees and other charges, pre-approval terms and conditions, prepayment charges, repayment holiday facility, insurance, etc. A home mortgage is a huge financial responsibility. Ensure that you take all these aspects into consideration and buy the home of your dreams.