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Question of the Week
Are there any Islamic banking finance formats that are useful to refinance a mortgage, i.e., by switching from conventional to Islamic financing?
A significant trend witnessed over the earlier few years is the institutionalisation of the Islamic mortgage finance segment as a key pillar of the Islamic retail asset suite. Clients are now approaching banks for a secure mode of refinancing alternative through Ijara, where a bank buys the property from the owner and leases it back to the client while keeping the valuation of the property higher than the amount financed by the bank. With regard to Islamic mortgage, lenders have now established a better understanding of the legal system. This experience has aided the sector in creating an improved understanding of risks and an overall confidence in the legal system.
A market study shows that Islamic institutions presently serve above 50% of the market demand, up from approximately 35% last year. This emphasises a shift in consumer mindset and overall acceptability of Islamic financing products in the market. In terms of growth rates, the Islamic banking sector has been increasingly coming to the fore, surpassing the conventional lending section. Considering the numbers, last year, Islamic banking assets in the UAE increased by 15% whereas those of conventional banks rose less than 10%. We believe that Islamic banking products can contend on an equal footing with conventional banking services.
We want to invest this year but are not sure if we’ll buy a house to use or for investment. Kindly advise.
Keeping an eye on the Expo 2020, the Dubai property market is gearing up for diversified growth and expansion which will maintain the market momentum. If deciding to capitalise in real estate, expect high principal appreciation in the long term. The question of whether to buy to live or buy to let depends on your financial plan and requirement. If you can continue living in the same place and get into the realty investment market, then you can enjoy the high rental income along with the benefits of capital growth. If you take mortgage finance to buy an investment home, the interest on the loan and most property expenses can be countervailed against rental income, and savings can be placed in an offset account that can later help diversify your investment portfolio. Know your personal circumstances and invest accordingly.
When we have so many options in the market, how should one prudently decide on a property to buy?
The Dubai real estate market has an enormous list of residential and commercial properties, and it is very complicated to decide which one is apt for you.
There has been a momentous increase of fresh inventory which has been inducted in the last six months with eye-catching pricing and payment options from the developers as they have understood the changing market dynamics and the need for affordable projects.
Still, if you are buying property for asset purposes, check a renowned locality where development should hold quality construction. This will benefit you in the long term with superior returns.
On the contrary, if you are buying a property for your own use, look for options which match your lifestyle, financial situation, convenience and preferences.
I am planning to obtain a mortgage. Can you guide me on what I should consider when selecting a lender.
Picking the right lender is one tedious job especially when you need to choose from more than 20. It is always advisable to appoint an independent mortgage expert who does the entire legwork and assists you in selecting the best mortgage product and lender that suit your requirement. However, conduct a market research and understand the different mortgage products offered by various lenders. Look for the one with the best interest rate. Understand the bank margin rate which will be applicable after the fixed loan period. Request for the complete amortisation schedule from the lender to calculate the monthly charges. Consider a lender that offers a range of both customised and prime mortgage finance products. And never overlook to calculate the additional property transaction cost. A lender that can provide prompt service after taking the loan can create a world of difference throughout the loan tenure.
What’s the best strategy to refinance a mortgage that has been signed off years ago at far higher rates?
Refinance allows owners to reduce the cost of their mortgages and gain financial flexibility in the long term. Refinancing a mortgage can lower the monthly EMI, help pay off the loan faster, consolidate debts, unlock the property equity and give one comfort to move from an adjustable rate to a fixed rate loan or vice versa.
There are two ways of refinancing: rate and term refinancing, and cash-out refinancing. In the first, you save money by abbreviating the monthly installments with the same property as security and paying off one loan from the new loan. This may include switching from a variable rate to a fixed rate.
Cash out refinancing is a fresh mortgage finance taken for extra money and is for those who want to access equity on the current property. It leaves the cash needed to pay off existing credit card and loan debts, closing costs, home improvements and any mortgage liens paying off.
Source: Dhiren Gupta, Managing Director, 4C Mortgage Consultancy
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