The math behind getting a home investment right
I am often get asked, “I’m earning Dh20,000 per month - can I buy a property in Dubai ?”
My answer is determined on a stream of questions which is what I’m going to elaborate on. There are more factors that come into play when determining if we are able to buy a property than just our income. All these aspects are different for every individual.
For argument’s sake, let’s consider a purchase through bank financing, as most buyers are looking for a mortgage when buying ready properties. As a starting point, an income of Dh20,000 per month certainly crosses the minimum threshold to obtain a mortgage.
Generally, your monthly salary needs to be 4x higher than your monthly mortgage payments, which can further vary based on current liabilities. There are a few requirements the bank will ask to get started on the pre-approval.
● Salary certificate
● Six-month salary slip
● Six-month bank statement
● Loan application document
● ID copies
Depending on the bank, the pre-approval validity can vary between 30-60 days and the cost from Dh500-Dh1,000. Once the pre-approval is in hand, make a point to understand how much the bank will lend and how much down payment to have in hand.
This pre-approval helps get immediate offers on distress assets that might be in the market for a short period of time. With a pre-approval, the seller gains more confidence in your ability to obtain the required finance to buy a property.
Fixing the rate… or not
Since bank lending can go up to a maximum of 80 per cent, the buyer should have in hand 27.5 per cent of the property value to cover the down payment and all transfer-related expenses. At this point, decide if you want a fixed rate or a variable.
If the pre-approvals are sorted and based on the mortgage type, let’s start onthe fun part - property hunting.
Based on a salary of Dh20,000 and not having any other liabilities, the bank will lend about 40x the monthly salary, which means Dh800,000. Since that is the maximum lending amount, let’s consider it to be 80 per cent of our target property value, therein allowing us to buy a property of up to Dh1 million.
The down payment along with closing costs would be about 27.5 per cent, which would equate to Dh275,000 out of which Dh200,000 would go towards down payment and Dh75,000 on closing expenses related to Land Department fees, the no-objection certificate, agency costs, mortgage registration, valuation and processing.
Let’s calculate what will the monthly repayments will be. Let’s consider we opted for the fixed rate mortgage for 20 years and at an interest rate of 3.5 per cent. Based on our borrowing of Dh800,000, we are looking at Dh4,640 a month, which is principal plus interest payment.
Adding up the costs
On a two-bedroom apartment for Dh1 million, which is about 1,200 square foot with an average service charge of Dh12 per square foot. That means a monthly maintenance cost equates to Dh1,200.
Factoring in mortgage repayments as well, we are looking at expenses of Dh5,840 per month. If our purpose for buying the property is investment for rental yield, then let’s see how much income we are able to generate. Let’s consider our property to be rented out at Dh80,000, which equates to Dh6,600 per month.
After deducting monthly outgoing in terms of mortgage payments and service charges, we are still looking at a positive income of Dh760 per month. Upon completion of mortgage payments over the next 20 years, we are now sitting on a fully-paid up property generating rental yield with only the monthly service charges as outgoing.
If the purpose of purchase is to shift from being a tenant to live in our own property, then instead of paying a rent of Dh6,600 per month, we are now spending Dh5,840 per month on bank repayments and maintenance fee.
It’s a winning situation - whatever the purpose may be.
- Aakarshan Kathuria is with RiseUp.