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First Time Buyer Guide

"Fixed term", "Variable rate", "Repayment", "Tenure", "LTV", "DBR" etc. Want to buy a house, but confused and put off by the jargon? Well, we hope this guide helps fill in the gaps.

Equated Monthly Instalment (EMI)

Refers to the monthly payments that you make towards repayment of the loan amount, over the term of the loan. The EMI = payment towards mortgage principal + payment of interest

Buyout/Re-Mortgage

Transferring your mortgage from one lender to another.

Early Repayment Charges (ERC)

As the name suggests, ERC refer to fees that lenders may charge you if you decide to pay off the mortgage earlier than the initial term of the loan . These charges are now regulated by the UAE Central Bank and buyers can expect to pay 0-2% of the outstanding loan amount depending on when they close their loan. The fee is 2% during the fixed rate period, and 1% during the variable rate period, and free after the 7th year of the mortgage. 

Equity

When you start paying off your mortgage, you start to build equity in the property. For example, if you’ve bought a property worth AED 1.5mn and have already paid off AED 500,000 that means you have built up AED 1,000,000 worth of equity in your property. This allows you to take either a top-up loan/equity release, which is additional borrowing on your existing loan that can be used for a variety of purposes.

Equity Release/Top-up/Additional Borrowing/Further Advance

After a mortgage has been fully disbursed, you can apply for additional borrowing at any time, subject to eligibility. You can use the built-up equity in your home to take out a loan to consolidate loans, or pay off unexpected expenses.

Loan-to-Value (LTV)

Loan-to-value refers to the percentage of the property value that the lender is willing to lend you. This is governed by the UAE Central Banks regulations, with specific details below.

CategoryProperty ValueUAE NationalsUAE Residents
First House or Owner Occupied <= AED 5m 80% 75%
Each borrower can only claim one property under this category > AED 5m 65% 60%
Second House or Investment Property All property Values 65% 60%
Property Purchased Offplan All property Values 50% 50%

Term/Tenure

This is the length of time over which you agree to pay off your mortgage. Mortgage terms/tenures are regulated by the UAE Central Bank, with a minimum period of 3 years and a maximum period of 25 years.

Mortgage Rates Types  

Fixed Rate Mortgages 
Charge a set rate of interest that does not change throughout the life of the loan. Although the amount of principal and interest paid each month varies from payment to payment, the total monthly payment remains the same.

Fixed rate mortgages are a great option for those who prefer:

  • Fixed payments - Your monthly payments will stay constant throughout the term of the fixed interest rate. 
  • Unaffected by changes in general interest rates – You are protected from sharp increases in interest rates, but also can’t take advantage of lower rates, unless you refinance.

Variable Rate mortgages
The interest rates can be changed at regular intervals (typically annually) by the lender or on the Account Review Date. This means that your monthly payments would usually change from year to year, and may decrease or increase.

Why it might be suitable for you:

  • Variable payments – Your monthly mortgage payments may change from year to year. Therefore, to avoid any unexpected surprises, you should invest time in understanding how the rate is trending.
  • Possibility of lower payments – However, since rates are variable, you may be offered a lower starting interest rate.
  • Rate calculation – Variable rates are generally linked to a standard rate, which may be a Central Bank rate, or an internal base rate set by the financial institution. If you want to be an informed borrower, it’s wise to know what your variable interest rate is based on.

Repayment Method

There are many different types of mortgage loans available, each offering different features and benefits. There are also various ways in which mortgage loans can be repaid. The type of mortgage loan that will suit you best depends entirely on your circumstances both now and in the future. 

Repayment Mortgage Loans
With a Repayment loan, your monthly instalments are made up of two elements:

  • The interest you pay on the loan
  • The repayment of the capital sum. 

The exact proportion of capital repaid in relation to interest paid is dependent on the term of the loan. A shorter term generally means that you will start to pay more capital than interest at an earlier stage.

A Repayment loan is the only option that will guarantee to repay your loan over a defined term, provided that you keep up with your payments. 

Interest-Only Mortgage Loans
With an Interest-Only loan, your monthly payments cover the interest and no capital is repaid. As you are repaying only the interest, your monthly payments are lower than a similar value Repayment loan.

However, you will need to find a way to repay the capital at the end of your Interest-Only period. An Interest-Only payment method can be selected for both under construction property phases as well as completed property phases. Please note, however, that under UAE Central Bank Regulations, Interest-Only loans can only be made available when buying the property for investment purpose with a loan period no longer than 5 years from the first drawdown date.

Insurance

Most mortgage lenders require you to have insurance. It can come in various types, and we hope the following clears up any questions.

Loan Protection Insurance/Life Insurance
For most lenders, it is mandatory to have Loan Protection Insurance (LPI) during the term of the loan, to cover the total amount borrowed. The insurance may cover a number of risks  including sickness, disability or death. The premium is typically charged monthly  and is usually added to the monthly instalment of the mortgage. Cost of the insurance depends on a number of factors, which can include age, health, lifestyle, smoking habits, or length of coverage. Most lenders will offer this insurance as part of their group policy. Alternatively, if you want to use your own insurance policy, many lenders will allow you to assign it , although there may be a fee for doing so. In addition, under certain circumstances, clients may be allowed to Opt-Out of insurance. 

Property/Buildings Insurance 
This insurance policy protects the owner in the event of certain types of damage to the property. Property insurance typically covers fire, wind, hail, theft and more. Property insurance is charged yearly and most lenders will offer this policy. Property insurance is mandatory on villas and townhouses. The recent building fires in Dubai Marina, Musaffah and Saadiyat Island have shown that property damage is a very real risk. As a result, all buyers are encouraged to check the insurance arrangements on any tower blocks where they are buying. 

Contents Insurance
This provides coverage that pays for damage to, or loss of, an individual’s personal possessions whilst they are located within that individual’s home. Contents insurance is generally not mandatory, but is offered by most lenders . Contents Insurance is especially beneficial for valuable items such as jewellery and artwork, which have unique value and are difficult to replace.