Financial planning when taking a mortgage

Financial planning when taking a mortgageDhiren Gupta - Managing Director, 4C Mortgage Consultancy

Despite new payment plans entering the market to entice homeowners, financial planning is essential when taking a mortgage for your home. Dhiren Gupta, Managing Director of 4C Mortgage Consultancy, sifts through the various home finance schemes available in the market.

Payment plans

Changing market dynamics and competition have made the developers come up with new payment plans.

They are reviewing their prices and presenting payment concepts which can be extended up to three years after completion; this certainly entices first-time homeowners.

But then, for off-plan developments, banks only finance 50 per cent of a property's value irrespective of purpose or buyer category. This means that the prospective homeowner needs to pay the initial 50 per cent as down payment.

Banks are normally bearish on new off-plan financing considering the higher level of risk associated with it. They are contented to provide mortgage support for properties listed under master developers and some projects of private developers.

The menace of buying off-plan without finance in place is that, in case your financial situation changes later on or you took the project from an unapproved developer, it will prevent most banks from lending you the final 50 per cent. You have to cough up the amount from your own resources.

When a developer ties up with a bank, they are just giving comfort to their patrons. With the secure mortgage plan, the project gets highlighted among investors and end-users as it gives them the confidence to lock their investment, so that is the only benefit a developer gets after tying with a bank.

Banks are very particular when financing off-plan projects especially by private builders as there are chances that they might call off the project, or the project might get delayed.

However, again, the finance option for off-plan development is only limited to 50 per cent of the original price of the property wherein the bank pays the balance amount as per the payment structured in the sale and purchase agreement.

Our advice for investors and end-users would be to study the background of the developer – whether they are a new entrant in the market, whether they have delivered in the past, whether their performance history is stellar – as there are more chances to get mortgage finance with a trusted brand.

It is important for an investor not to get easily attracted by the concocted promises made by some developers.

They should take time to study their assured deliverables, project resale value along with the financial feasibility and then make an informed decision.

Expert opinion is key

Mortgage as a product itself offers various options which make it more complex to understand; hence, an investor does need an expert opinion to weigh the possibilities.

Currently, almost every bank is eyeing mortgage or home finance as a major component under retail banking division.

There is huge competition among banks which forces them to introduce new variants in the product.

Step rate offering is one of them wherein the client is offered a lower interest rate in the first year. The rate gradually increases the next year and thereon.

Mostly, the rate is there for three years and then it is linked with a variable rate in the bank. So, when we come up with an average rate, it is lower as compared to a fixed rate offered in the market for the same period.

There are banks in the market which lend the transaction cost for the transfer of the property at the Dubai Land Department.

This would mostly include the transfer fee, real estate broker fee, mortgage registration fee and other expenses.

Ideally, this product is offered as personal finance.

Also, there is an option to pay the interest only on the mortgage which reduces one's monthly outflow towards the instalment. However, this option is only available for a short period of time.

Money matters

• Smart investors have three to six-month savings cushion to shield an emergency like unexpected job loss. Plan in a way that you can endure all financial obligations for the next six months.

• Start saving extra even if it is just a few Dirhams a month. If you save enough, channel it to pay the extra principal on your mortgage.

• Avoid unnecessary credit card use. Put down your monthly gross income, monthly expenses and leave plenty of room for unanticipated expenditures.

• Talk with a trusted source before investing.

Here's a checklist before selling your property

Source: S. Dhar, Special to Freehold


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