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The softening of property prices and the slew of projects launched to cater to the middle income group are shifting the real estate landscape in Dubai and Abu Dhabi. Dhiren Gupta, managing director of 4C Mortgage Consultancy, analyses the property market and offers advice on how to tick the right boxes when opting for a home mortgage.
The real estate market in Dubai is likely to maintain a healthy equilibrium because of the sustained government expenditures towards infrastructure projects and strong economic fundamentals.
Similarly, there has been significant growth in the real estate sector in Abu Dhabi as well, with around 81 per cent of developers launching new projects in the recently concluded Cityscape Abu Dhabi. Despite a decline in oil prices, the country’s economy is on a steady upward trajectory and is expected to grow by 4.5 per cent this year.
The softening of property prices and the positive investor sentiment induce sufficient money supply in the market. While the mortgage cap has the desired effect of cooling the property market, it has restricted demand among both UAE nationals and expatriates.
Currently, the challenge for new buyers is to get their hands on the cash to start the ball rolling.
Renting versus buying
Certainly, when one finds a lower interest rate and a considerable low property value, one should consider buying a property in the UAE. And definitely for long-term investment, it is pragmatic to buy a property here to leverage the capital appreciation. Real estate in Dubai is a pretty sanguine investment, holding promise of good returns.
If we talk about the current scenario, it is now cheaper to pay a mortgage rather than an equivalent rent. At the prevailing mortgage rate of 2.99 per cent on a 25-year home loan, the monthly installment for Dh1 million works out to Dh4,737, i.e., approximately Dh57,000 annual cash outflow. So, if you are already paying an annual rent of Dh57,000, you already have the confidence to pay for a home loan instead of a rental payment. However, there has to be a minimum cash reserve of 25 per cent to be shelled out for the down payment of the property with additional fee of around 8 per cent for the transaction cost.
Beginning last year, the UAE Central Bank instructed all banks to carry out a stress test on customers when calculating their debt burden to eliminate the chances of over-leveraging them in their monthly payment obligations, thereby reducing the funding ratios from the bank.
To determine if you qualify for a loan, the bank considers debt-to-income ratios, which include your credit history, your monthly gross income and how much cash you will be able to accumulate for a down payment. However, the bank takes only 50 per cent of the total monthly income to calculate your loan eligibility. Talking about principal, interest and insurance over here, then it should not exceed 30-35 per cent of the gross income.
Since last year, banks are focusing on giving lower rates for buy-outs wherein the cost of transaction is minimised by the absence of processing fees. A few banks are even giving options of free property valuation.
Also, as per the new guidelines by the Central Bank, banks can charge customers only 1 per cent or Dh10,000, whichever is lower, to move out from one bank to another. New regulations, stable real estate prices and falling interest rates – all these factors are enticing the customers to opt for remortgage.
Currently, the mortgage market is experiencing probably the lowest finance rates in the history of mortgage lending in the UAE.
When you are buying or refinancing a house, there are two important factors you would like to understand from a mortgage lender after submitting the pre-appraisal income credentials. First, how much you can qualify for; second, the interest rate spread for the loan tenure.
Re-financing helps you obtain a lower or better interest rate, reduce the monthly EMI, switch from an adjustable-rate mortgage to a fixed-rate one and vice versa, helping you combine primary and secondary mortgages for a large loan, and consolidate and pay off other outstanding debts.
• There is no hidden cost involved in taking a mortgage, but you should be vigilant and understand all the nitty-gritty involved when finalising one.
• There are many ancillary costs associated with a mortgage loan like initial pre-approval fee (Dh1,000), arrangement fee (around 1 per cent of the loan amount), fixed period rates, variable period rates, and life and property insurance which can fluctuate and vary from one bank to another.
Source: S. Dhar, Special to Freehold