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Getting onto the property ladder is one of the biggest decisions one makes in life. Hence, when investing in property, it pays to do so prudently.
If you are planning to buy a home, know what you can afford to borrow. Before you arrange your mortgage, find out where to get a mortgage, which type of mortgage will address your need, the lending criteria, down payment and how the whole process works. Before committing to a long-term investment, it is important to have a clear understanding of the procedures to make a wise decision and confidently look around for the best deal.
Basically, mortgage rates are defined as fixed and adjustable rates. A fixed rate offers a rate of interest over a defined period, whereas an adjustable or variable rate has a rate that is associated with an index or benchmark rate; hence, can be changed over time. With fixed rates, the borrower knows precisely how much his monthly payment would be and can easily manage his budget regardless of market fluctuations. When the interest rates are going up, a fixed mortgage plan is recommended, but when there is a downfall in rates, choose adjustable mortgage rates. Most banks have one to three-year fixed rates following which the variable rate and the current EIBOR rate come into effect. Normally, these rates will be higher than the initial fixed rate, so shop around for a remortgage facility at the end of a fixed deal. Whether it is fixed or adjustable rate, it depends on your circumstances.
The factors which may sway your decision are how a higher monthly payment would influence your budget if rates increase and the length of time you plan to be in your house.
Loan to value
The maximum amount you can borrow will depend on your age, nature of income source, credit score, predicted future expenses and the lender. As per Central Bank regulations, one’s total debt burden ratio (DBR) cannot surpass 50% of the income.
Banks conduct due diligence by checking your financial position and income profile which determine your capability to offset a loan. The maximum loan to value and interest rates vary among institutions.
If you have a cash reserve of 25% to 30% of the property purchase price, then deposit will not be a big hurdle as your deposit amount will make a difference to your mortgage deal. A bigger deposit gives a wider scope of offerings along with lower rates, so the bigger your deposit, the smaller your loan. Likewise, there are additional fees associated with a mortgage that would be around 8% of the property value which include pre-approval and processing fees, life and property insurance, and Dubai Land Department (DLD) and trustee fees to complete the transaction process.
The mortgage process involves a series of steps completed over a couple of weeks. Once the initial assessment is conducted, the lender offers a pre-approval letter. Afterward, you have to shop around for the property in your desired suburb, keeping in line with the affordability amount. Once the MOU is signed, the required documents are submitted to the lender for evaluation. Thereafter, the financial institution drafts the final offer letter as per the agreed terms and conditions. Property transfer takes place at DLD.
It is quite essential to know the complete process and make a smart decision that will serve your need.
The mortgage process is lengthy and can be time-consuming; hence, using the valuable and impartial advice of an independent broker can be of great benefit and help you save time and money by identifying the bespoke mortgage solution that fits your investment budget. So, shop smartly and live happily.
Here are some mortgage options for budget properties.
Source: Dhiren Gupta, Special to Freehold
Managing Director, 4C Mortgage Consultancy