A guide on the top types of mortgage loans in Dubai

Buying real estate is usually a complicated process, which makes buying a home stressful, terrifying, and frustrating, especially for first-time buyers. The fear of several unknown variables also contributes to the complicated process.

Buying a home requires making several decisions, such as where to live, choosing the right agent and, most importantly, selecting the most suitable mortgage to finance your home purchase. The mortgage choice will include the type of interest rate, mortgage duration and upfront costs.

This guide provides all the information you need on each type of mortgage in Dubai and how they work, including projects to consider.

What is a mortgage?

A mortgage refers to a loan specifically for financing buying a property, like a commercial building, land, house or apartment. Instead of paying the full amount of the property with a mortgage, you can pay a part of the mortgage while your provider pays the rest.

Most mortgages have a 25-year payment plan, which may vary depending on your credit report and the mortgage lender. However, regardless of the mortgage payment plan, the lender retains the property's ownership under the mortgage until the buyer makes all payments following the predetermined repayment plan, usually monthly in Dubai.

This means the home's value will be collateral until you have paid off the loan. If you do not adhere to the payment plan, the lender can repossess and sell your home to pay for their losses.

How do home loans work in Dubai?

The application process to get a mortgage in Dubai is usually straightforward. You can apply directly to the bank for a loan or hire a broker to handle the process. You must register your home loan with the Dubai Land Development (DLD) in both cases.

In most cases, working with a reputable mortgage broker is better. The broker can provide information and insight into the property market in Dubai and guide you to make the best choice for a home loan.

What to expect in a Dubai mortgage

• Mortgage duration

  The maximum mortgage loan term in the UAE is 25 years for people receiving a salary up to the retirement age of 65 and 70 for self-employed people. Choosing the longest term is best because it helps you maximise your borrowing capacity.

  Generally, a longer-term increases the total interest you will pay on the loan but reduces your monthly payments. You can always pay additional money, up to 10% of the principal without penalty, during the mortgage term if you want to pay it off sooner. However, ensure you seek professional advice before deciding on the term of your home loan.

• Lending time

  In most cases, the limit for a mortgage is 25% of your monthly income. However, when calculating mortgage limits, the provider will also check your existing debts, like car loans and credit card debts, current savings, income type (full-time or contract), and other assets, including lifestyle factors like your number of dependants.

  Depending on your credit check result, the amount you qualify for may be lower than 25% of your income. Mortgage providers have different capacity evaluation formulas.

• Eligibility criteria

  UAE nationals and foreign residents must be at least 21 years of age, demonstrate a stable income, be able to complete their mortgage by the legal retirement age and have a good credit rating to qualify for mortgages. Foreigners also have a clause stipulating that the total amount, including interest and principal, cannot exceed the total amount expected to be earned in seven years.

  The average salary requirement is AED 10,000 for foreign nationals and AED 7,000 for UAE nationals. However, mortgage lenders prefer giving loans to residents because they have more options for paying the money. This means non-resident foreign nationals have limited mortgage options. If you fall under this category, consult a broker about your options.

• Principal

  This is the total amount of the loan. For instance, if you took a mortgage of AED 200,000 to buy a home in Dubai, the AED 200,000 is the principal amount. Usually, the principal amount on a loan covers 70% - 80% of the property's cost, while the deposit should cover the rest.

• Interest rates on mortgage

  Mortgage interest rates in Dubai are usually between 2.99% - 5%. The interest rate is a monthly percentage added to each mortgage payment. The total amount expected to pay on the principal will depend on whether you select a variable or fixed interest rate.

  A fixed-rate usually runs for two or five years but has a higher rate. After this period, the provider will apply a revision rate, which may mean your rate may increase after the revision. Variable interest rates are also difficult to calculate because you cannot predict the real estate market. This aspect of mortgage also makes getting a broker's advice important to save money in the long term.

• Repayment value

  The repayment value depends on the mortgage provider following your credit report. The repayment is usually less than 25% of your monthly income. However, if you do not have a debt obligation, it may be up to 50% of your monthly income.

• Upfront costs

  You need to budget the following before applying for a mortgage in Dubai.

  25% of the purchase price should be less than AED 5M. Properties exceeding this amount get reviewed on a rolling basis, but non-residents buying an investment property may need to pay up to 40% upfront as a deposit.

  Other costs include:

  • Valuation fee – between AED 2,500 – AED 3,000.
  • 2% real estate commission (this may vary)
  • 4% property transfer fee to the Dubai Land Department

  Some Dubai banks allow applicants to include three-quarters of the total purchase fee in their mortgage.

• Documentation or paperwork

  The paperwork needed will depend on a few factors, such as your residency status in the UAE and the financial institution providing the loan. Generally, the following documents are necessary.

  • Evidence of residency (copy of tenancy contract, DEWA bill)
  • A duplicate of personal identification documents (Emirate ID or passport with valid visa)
  • Proof of creditworthiness or funds (payslips, tax returns statement, latest credit statements, salary certificate, bank statements for the past six months). The law in Dubai requires that your debt payments don't exceed 50% of your income, so many banks usually accept higher debt profiles
  • MOU copies when applicable
  • Employment documentation
  • Bank statement of the company if you are self-employed
  • Copy of the Title Deed when applicable
  • Business profile on company letterhead
  • Copy of trade license
  • Audited financial statements of the last two years if you are self-employed
  • Copy of board resolution

• The size of the deposit- Loan to Value (LTV)

  Paying a deposit is necessary to buy a home. This deposit goes towards the property's cost and is called the Loan to Value (LTV). This means the percentage of your home's value you own to the percentage of your mortgage's value.

  LTV is important because most lenders offer lower interest rates for people who make larger deposits because they usually have a lower risk.

  The UAE Mortgage Law states that first-time home buyers who are foreign nationals must pay at least 20% of the purchase price as a downpayment for properties with up to AED 5 million worth. If the worth of the property is above AED 5 million, the required down payment is 30%. Most banks in the UAE only finance up to 35% of a property's value for non-residents.

  UAE nationals are eligible for up to a 5% bonus. The cap for LTV ratios is 50% for properties still under construction, and the other 50% can be funded. However, these rates are subject to change.

• Taxes

  Dubai doesn't have property tax, but you must pay certain fees. If you want to rent out a property, a 5% surcharge on the average rental value in the area may apply. You will also pay a monthly housing fee or municipality tax.

• Mortgage insurance

  Mortgage insurance only applies if you can only pay below 20% of the LTV. In this case, you will be responsible for the mortgage insurance cost, but it protects your lender. If you do not make mortgage payments in the future, mortgage insurance will pay the provider a part of the principal.

  However, you remain liable for the entire loan and can lose your home in foreclosure if you do not meet your repayment requirements.