How to gain the best mortgage

Q: I am seeking a mortgage for an apartment in Dubai. How are interest rates calculated? Do they differ from one finance company or a bank to another?

With the ongoing property boom in Dubai, more and more people are considering buying apartments and villas. Interest rates are probably the most important issue to consider, since the ultimate aim is to borrow sufficient capital to buy the asset - your new home - at the lowest possible cost.

Different companies do charge different interest rates, although they tend to sit in a band that is determined by market factors. However, the true cost to the home-buyer can vary significantly depending on how the deal is structured.

When comparing mortgages, probably the best rule of thumb initially is to compare the monthly amount that is being quoted, rather than comparing the various interest rates that are on offer, which are typically expressed as the Annual Percentage Rate (APR). This can be calculated in different ways, so two companies could offer you the same APR but charge different monthly payments.

You also need to look at the other costs. For example, different companies will charge different rates for application fees, valuation surveys, exit fees, redemption penalties and home insurance, if that is built into the deal. These are one way in which companies make a profit, and can create a major difference in the overall cost, even if two companies are charging the same interest rates.

Perhaps the important factor to consider is the type of interest that is being charged. This determines the overall cost and it is essential to know exactly what you're signing up for.

A standard variable rate mortgage is probably the most common form of loan that is available in the UAE. The interest rates for these loans vary, depending on the current climate in the market. The terms differ from company to company, but they will typically offer a mix of benefits and costs for the borrower.

You can also consider a fixed rate loan. These are paid back at a set interest rate. In this way, you're protected from major changes in the market. However, you may find yourself paying more than other borrowers if interest rates drop.

Whichever type you choose, the key question is how frequently the interest in calculated. A monthly interest calculation could leave you paying more, since a payment won't be factored into the total amount you owe until the end of the month. A daily calculation means that each payment reduces the amount you owe, so you pay less interest in the long-term.

In terms of deciding which is best for you, you need to balance flexibility with price. The cheapest mortgages tend to have the toughest penalties for late payment, so don't wed yourself to a deal that penalises you in the long run.

Overall, read the terms and conditions carefully, and run the package past a third party adviser. Your mortgage will be "in the family" for almost as long as you are in your family home, so it's essential to make sure you are comfortable with the deal you finally go with.

- The writer is an expert consultant at Nexus, a leading financial adviser in the Middle East. The opinions expressed above are the writer's and don't necessarily represent views of Gulf News. Readers are encouraged to thoroughly investigate all investment decisions. Please send your questions to advice@gulfnews.com.