Dubai Real Estate Mortgage

Importance Of Mortgages In Dubai Real Estate

Dubai real estate mortgage plays a significant role in buying properties in Dubai. Expats can easily avail of the Dubai real estate mortgage facility while investing in real estate in Dubai. In order to get substantial financial support, Dubai real estate mortgages are highly helpful. The buyers can totally depend on the mortgages for the exclusive properties they dream about. Thus mortgage facilitates the ex-pats in owning their dream home.

Global investors are lured by the thriving Dubai real estate sector. Dubai real estate mortgage enables them to buy properties without ready cash in hand. Thus, more and more investors from home and abroad are easily able to purchase properties, which in turn has led to the rising economy of Dubai.

Availability of mortgage is a stimulating factor for more and more potential buyers to participate in the investing process despite having sufficient funds. This increases the demand for Dubai real estate which ultimately leads to a rise in the price of properties.

Astute investors can diversify their real estate portfolios. Dubai real estate mortgage helps investors to invest in different types of properties. This in return reduces the risk factor and increases capital gain.

Investors can buy real estate and put it on rent. This will help them earn a substantial amount from their rental properties and they can repay their mortgage payments.

Easy access to mortgages, creates a consistent demand in the market for Dubai real estate, protecting the market from any fluctuations. Thus the market turns out to be stable and more investors find it lucrative to invest.

Understanding Dubai Real Estate Mortgages

Certain key factors need to be understood well before going deep into Dubai real estate mortgage like the mortgage process and the rules and regulations governing it, mortgage rate, Loan to Value ratio and so on. There are various financial organizations that provide mortgages to expats. The most common and easily reachable is the bank, both local and international.

Definition And Purpose Of Mortgages

Mortgage refers to a transaction between a lender and a borrower. It is a legal agreement between two parties. The lender is generally a financial institution like a bank and the borrower can be any business or individual. A mortgage is a loan given for the purchase of real estate. The expats can buy residential units for personal use and also use this loan to invest in properties.

Mortgages help people to buy or invest in their real estate without thinking about the financial constraints of paying the full amount at a time. Expats can make a part payment of approximately 25% and for the remaining balance, the mortgage works. It is a collateral loan, where the property of the homebuyer is the security deposit with the lender.

The Dubai real estate mortgage system works on an agreement made for monthly installments. It is a legal commitment on the part of the homebuyer to pay back within the stipulated time frame. In case he fails to pay back within the predefined time limit, then the financial institution has the legal right to seize his property, termed as a foreclosure.

Role Of Banks And Financial Institutions

Financial institutions and banks play a pivotal role in the Dubai real estate mortgage process. Certain criteria of the borrower are checked before the approval of the loan. Mortgagor’s asset value, creditworthiness, salary or business income have to be thoroughly assessed to determine his loan eligibility and rate of interest. 

The rate of interest and duration of payment is determined by the bank or the financial institution from where the expat is taking the loan. Depending on the mortgager’s credit history, market conditions, duration of payment and the loan amount, the interest rate is evaluated.
 

Legal And Regulatory Framework For Mortgages

The Dubai Land Department(DLD) along with the Central Bank of UAE  govern the legal and regulatory framework of mortgages. The mortgages, documentation of the mortgages and the registration process are all supervised by the Dubai Land Department. They need to maintain an official register for the entire process and work in compliance with the government laws for Dubai real estate mortgages.  

Dubai real estate mortgage is governed by Law No 14 of 2008. The law includes registration of property, contract of the mortgage, rights and duties of the involved parties, foreclosure system and other such matters.

The borrowers are well protected by the law and UAE Central Bank. Certain guidelines are given to the lenders, which they strictly need to adhere to while issuing the mortgage. For instance the transparency in the charges levied for the mortgages, disclosure requirements and proper treatment of the expats. Hence the borrowers feel safe with the Dubai real estate mortgage system.
 

Types Of Mortgages Available In Dubai

As per the rate of interest, there are various types of mortgages available in Dubai for the real estate sector.  Which deal is the best for you totally depends on the interest rate incurred for the mortgage. Some of the mortgages are explained which you can refer to while buying a house in Dubai.

 Conventional mortgages

Conventional mortgages are also known as repayment mortgages. The borrower needs to pay a specific part of the principal amount along with the interest charged on it. The installments are spread across a span of 25 years. So the buyer can plan well in advance as to how much he has to pay as a loan.

 Islamic (Sharia-compliant) mortgages

Charging interest on loans is forbidden in Islam. Hence the financial institutions cannot levy any interest on the mortgage. It works in a completely different manner. They have certain guidelines to follow.  Let us look into the two major Islamic mortgage models, Ijarah and Murabah.

The Islamic financial concept of Ijarah is similar to that of a lease agreement. The ownership of the asset remains with the financier till the specified lease term. The borrower keeps paying rent to the lessor till it completes the loan amount. Once his loan amount is paid, he gets the ownership of the real estate.

The other type of financing is Murabaha financing. In this financing concept, a contract is made between the financial institution and the asset buyer. The real estate is purchased by the financial institution on behalf of the borrower and charges a higher price from him. The borrower pays the among within the specified time duration.

Shariah-compliant mortgages are highly beneficial as they are not charged any late payment fee(but the bank can charge some amount).

 Fixed-rate mortgages

As the name suggests, Fixed-rate mortgages have static interest rates for the specified duration. So the buyer can plan well in advance as to how much he has to pay as a loan.

The market fluctuation or Emirates Interbank Offered Rate. (EIBOR)  does not affect the interest rate in any way. 

Adjustable-rate mortgages

In the Dubai real estate market, the interest rate gets adjusted as per the installment repayment structure. This type of scheme is known as an Adjustable-rate mortgage. This interest rate varies depending on the financial institution’s base rate or LIBOR. 

 Off-plan property financing

In Dubai, the properties which are under construction are available for purchase through off-plan property financing. A certain amount of downpayment is needed at the initial phase and the remaining can be given after completion of the project. Home buyers in Dubai are nowadays keen on making investments in these off-plan properties since the return on investment on these assets is high. The rate of these properties is much less than the completed projects. Investors can get it at a price of around 10 to 30% less. And finally, when it is completed, the value of the asset automatically goes high. At this point, the investor can even sell it off for a capital gain.
 

The Mortgage Application Process In Dubai

The several steps involved in the Dubai real estate mortgage application process are given below in detail.

Pre-qualification and eligibility assessment

• There are certain pre-qualifications and eligibility criteria for Dubai real estate mortgages.
• The borrower should be a resident or national of the UAE
• His age must be between 21 to 65

The monthly income of the borrower should be around 15k if he is a salaried person and 25k AED if he is doing some business.

Documentation requirements

The documents required for the borrower while applying for  the mortgage are:

• Copy of Emirates ID
• Income proof of the individual, salary certificate and other income proof
• Last six months' bank statement
• Residence proof

Loan application and approval

Loan application and approval for real estate in Dubai undergo various steps. The borrower needs to research well for the right bank suiting his criteria. If he is not competent, he should take the help of a broker, who knows the market well. The bank should be registered under DLD.

Once the borrower gets the right bank, next he has to look for the mortgage type depending on his property type, lifestyle, amount of load needed and the amount he can repay.

The next and most important step is the pre-approval letter for the home loan.  This is an official document given by the financial institution proving you as eligible for the home load. The homebuyer needs to review the terms and conditions mentioned in the letter carefully and then sign the documents. The validity of the pre-approval letter is from 60 to 90 days depending on the bank.

Property valuation and appraisal

The next step is searching for the right property and finalizing the agreement with the bank or financial institution. The property is then evaluated by the bank for its right value and settled with the borrower. Finally, the said amount is disbursed by the bank to the seller of the property and ownership is transferred to the home buyer. 

Now the ex-pat is the owner of his dream house.

Mortgage terms and conditions

As per the Dubai Mortgage Law, the homebuyer has to deposit 20% of the total amount in the initial phase and the rest 80% he will get as a loan. But it works a little differently for off-plan property mortgages. 

Factors Influencing Mortgage Terms And Rates In Dubai

There are various factors that influence terms and rates in Dubai

 Creditworthiness and financial history

The ex-pat’s income stability, good credit history and creditworthiness and depth to Income ratio all these factors play a vital role in the mortgage terms and rates in Dubai. If the borrower has a stable financial source and a good track record office credit profile then it is more likely for him to get better rates for the mortgages

 Loan-to-value ratio

The next influencing factor for the mortgage terms and rates is the loan-to-value ratio which is represented by the amount of loan the expect wants in comparison to the value of the property. The lesser the ratio of LTV the more the chance of getting good terms and rates for the mortgage.

 Interest rates and market conditions

The global market and the market in Dubai affect the interest rates of the mortgage. Mortgage rates are more favorable when the interest rates are low. When the market rates go high or there are changes in the rates of the central banks of UAE, the payment terms of the borrower also goes highland the vice versa.

Mortgage terms are also affected by property prices. Market trends and the demand and supply curve of the Dubai market play a significant role while determining the loan-to-value ratio and the interest rates. The bank or financial institutions take into account the market conditions and the risk involved in the fluctuations happening in the market.

 Loan repayment period

The loan payment period also plays a vital role in determining the interest rate of the market. The shorter the term of the mortgage the less the interest rate while the longer term ends with higher interest rates.

Responsibilities And Obligations Of Mortgage Borrowers

There are several responsibilities and obligations of the mortgage for us which he needs to keep in mind while purchasing Dubai real estate.

Escrow accounts and disbursement of funds

Escrow accounts in Dubai are used for swift transactions of mortgage payments and it also safeguards the buyers and the lenders providing transparency to both parties. Financial institutions can have their members as Escrow agents who are in charge of looking into the receiving of the installments and swift disbursement of the payments.

The terms and conditions of the Escrow account comply with the government rules and regulations and are applicable to any transaction done. After checking for all the criteria for the mortgage the Escrow agent can disperse the amount through the escrow account as per the agreement between the buyer and the seller. There should be perfect transparency while the disbursement of the funds takes place in order to protect against the misuse of the funds. Both parties need to abide by the law of the land.

The Law is specified by the Dubai real estate regulatory agency RERA which protects all the parties involved in the mortgage process that is the lender the seller and the buyer

 Loan repayment and installment obligations

The borrowers in the Dubai real estate mortgage system need to make payments in monthly installments towards their loans. The amount of the installment that he needs to pay depends on the factors like the interest rates, the amount taken as a loan and the time duration within which he is going to complete his loan tenure.

The monthly installments have to be paid by the borrower on or before the date mentioned in the mortgage agreement. It is specified by The Financial Institutions during the time of the agreement and the borrower should avoid delay or non-payment in order to maintain a good track record.

 Property insurance and maintenance requirements

Property insurance is another aspect of the Dubai real estate mortgage system. The insurance policy should protect their asset against the risks of natural calamities, theft, fire and other such damages to the property.

Replacement value for the damaged asset should be given under the insurance coverage and the lender should get an update about the insurance policy going on. The borrower needs to pay the premium within the stipulated time and avoid late payment late fines. The coverage under the insurance varies from lender to lender.

For example, some may include the settings and fixtures of the buildings whereas others may not but all the policies should cover the accident damages. Thus the borrower always ensures that they maintain the property  well against any damage  and be careful The maintenance requirements of the asset are checked by the lender at fixed intervals of time to ensure the properties are well kept because  poor conditions of the Asset lead to depreciation of its value.

Mortgage Considerations For Dubai real estate investors

The property type the status of The Residency where it is located and the governing rules and regulations of that particular place are the factors that govern the down payment requirement for mortgages in Dubai real estate.

Down payment requirements

Generally, the investors need to pay 20% of the Asset Value as a down payment during the purchase of the property. However, the investors who are not a resident of the UAE have different down payment criteria; they need to pay 25% of the property value during the initial phase.

Debt-to-income ratio 
  
While making mortgage considerations for Dubai real estate, the Debt to Income ratio also needs to be taken into account. The higher the ratio the lesser the chance of the investor getting a mortgage from the lender, since this shows the incapability of the investor to repay the mortgage.

While considering the DTI the lender should also include the rental income of the investor along with the credit score, down payment history, and the type of loan he has taken. Generally, the ratio of DTI approved is  36% to 50%, varying from case to case.

The debt to Income ratio is calculated by taking the monthly debt payment divided by the gross monthly income before any deductions.

Mortgage Prepayment And Refinancing Options

Mortgage prepayment and refinancing options for Dubai real estate investors help them to save the amount paid on interest and the during and the terms and durations of the mortgage the payment can be made partial prepayment or full.

In the partial prepayment option, the borrower will pay the principal loan amount stipulated for that installment along with some additional amount so that the duration of the mortgage term gets shorter and the amount gets reduced. In full prepayment, the borrower pays the entire amount thereby saving on time and the interest rate. 

But there are certain penalties associated with this if they follow the pre-payments as per certain agreements in Dubai. So before making the pre-payments, one has to carefully go through the terms and conditions mentioned in the agreement.

Refinancing options help investors in Dubai real estate mortgages. The borrower can change the terms of the mortgage.

He can either extend or shorten and thereby adjust the rate of interest. Depending upon the investor's goals and stability the investor can opt for refinancing options.
 

Implications Of Currency Exchange Rates

Currency exchange rates play a  leading role in the purchasing power of the investor. If the rate is lower the investor gets more potential to invest in real estate and on the contrary if the exchange rate gets high, the investment opportunity gets reduced. When UAE Dirham AED increases the foreign investors purchasing cost increase which leads to a stronger economy for Dubai

Risks And Challenges In Dubai Real Estate Mortgages

There are various risks and challenges associated with Dubai real estate mortgages. Let us look into them one by one.

Volatility In Property Prices And Market Conditions

When there is volatility in the property prices then the real value of the assets gets affected thereby affecting the Dubai real estate mortgage. The fluctuation in the market leads to a greater effect on the loan-to-value ratio.

Interest Rate Fluctuations

If the conditions of the markets are not stable the interest rates of the mortgage keep on fluctuating. This has an adverse effect on the borrower's economy. The volatility in the market leads to fluctuation in the interest rates which destabilized the economy. If the volatility persists, the rate of interest on the mortgage increases.

 Regulatory Changes And Legal Considerations

The regulations on Dubai real estate mortgages and the legal considerations change with time. This affects the transactions of the mortgage. So the borrower should take proper consultations with legal professionals to ensure compliance with the regulations and take care of the other legal aspects.

 Foreclosure And Default Risks

The risk involved in default is that they need to pay a late payment fee along with the interest charged; this can have an adverse effect on the credit score of the borrower. But still, if the borrower fails to repay the loan within the given time frame, the law of Dubai ensures the lender confiscates the properties legally by foreclosure.

Role Of Mortgage Advisors And Professionals In Dubai

The mortgage advisors and professionals in Dubai play a pivotal role in Dubai real estate mortgages.

Mortgage Brokers And consultants

In Dubai, real estate mortgage brokers are the intermediary body who negotiate between the lender and the borrower considering the condition of the borrower and his capability to repay the mortgage. The mortgage broker and the consultants advise the borrower on specific real estate and specific mortgage types as per his needs and capacity to repay.

Legal And Tax Professionals

In Dubai, real estate mortgage legal advisors play a significant role. They check that proper rules and regulations are followed by both parties and that due diligence is conducted on the assets to verify if any legal dispute is there in the property or not.

Real Estate Agents And Developers

The real estate agents guide the buyers with the appropriate property as per their financial condition and preference. They help the home buyers in doing all the documentation related to the mortgage. The negotiation between the lender and the buyer is done by the real estate agent.

The developers play a great role in the real estate market by providing pre-construction financing options and flexibility in the payment structure during the development phase The developers collaborate with the Financial Institutions to customize the package as per the customer's capacity and provide tailor-made packages to the customer within his reach.

Future Trends In Dubai Real Estate Mortgages

With the advancement of technology and various innovative options by financers, the future trend in Dubai real estate mortgages will change in all dynamics.

Technological advancements in mortgage processes

The process of the mortgage in Dubai is thoroughly revolutionized by the advancement of Technology. The Digital mortgage platform is the place where the borrower and the lender interact digitally. The investor sitting on the internet, can fill up his application form, submit all the documents and sign the deed. 

The next is the mortgage calculator. The availability of online calculators helps borrowers to calculate the payment they need to pay, taking into consideration the interest rate, the amount, and the duration. Thus they can compare the various mortgage options and take the best one that suits them.

Next is the AI-powered mortgage broker. Using artificial intelligence the customer's needs are evaluated and customized products are given to them. This helps the investors to take quick decisions saving time and energy.

Introduction of innovative financing options

The Government of Dubai has introduced various innovative financing options for real estate mortgages. One of them is the rent-to-own scheme where initially the borrower can take it as a rental basis and later on purchase it making the requisite down payment. Crowdfunding is also a new concept that helps investors in the mortgage process. The blockchain technology used by the DLD makes the mortgage process simple to the end user and it has also brought transparency for all the stakeholders.
 

Conclusion

The Dubai real estate market has grown in leaps and bounds in recent times which attracts investors from all across the globe. The various iconic projects like the Burj Khalifa have made Dubai its architectural prowess. The government's intervention in Dubai's real estate has attracted global investors. Above all the development of the tourism sector, and the advancement of technology have added more to the Dubai real estate segment making Dubai a real estate tycoon.