Is your loan a burden?

A mortgage is a long-term commitment for most and applying for one can be an intimidating process, especially if you’re doing so in a new country. So it is important for customers to understand what they are getting into. Here’s a step-by-step guide on things you need to know before applying for a home loan.
The right mortgage
According to RAK Bank, when deciding on whether or not you are ready to take a loan, ask yourself these questions: do you have other financial commitments? Do you have a regular source of income? Do you have leftover funds at the end of each month? Do you have money saved for down payment? Can you pay a mortgage each month?
According to Abu Dhabi Commercial Bank (ADCB), UAE residents above the age of 21 years and non-residents above the age of 25 are eligible to apply for mortgage services. The minimum salary requirement is Dh8,000 for national residents, Dh15,000 for expatriates and Dh25,000 for non-residents.
Many factors come into play when choosing a mortgage — from the interest rate to individual profile, set up and exit fees, early repayment, term, loan to value and which bank offers the best combination for your purchase.
How to choose a bank
Before choosing a bank, make sure you know it well. Fix a meeting with potential banks and check the terms of mortgage in detail before signing anything.
Factors you need to look into include: will your bank lend to the building you want to buy? Can you settle the mortgage by over-paying the monthly rate from time to time? Will you be charged redemption penalties? What happens if you lose your job? What happens if you sell your property before the loan is paid off?
According to ADCB, you have the option to settle the loan early and obtain a property release. However, an early discharge fee will be levied. Also, mortgage loan payments cannot be deferred, as per bank policy.
Make sure you know who your day-to-day point of contact is at the bank and ensure you have a name and telephone number who you can call for follow-ups or in case of an emergency.
Get a consultant
Mortgages offered by
different banks are not all the same. Make sure you shop around to find the right mortgage that suits your profile and don’t just go for the cheapest option, as the rate might increase dramatically once the initial grace period ends.
Engaging the services of an independent mortgage consultant might be the best way to secure the mortgage terms for your situation.
Mortgage brokers also get preferential rates based on the volume of work they provide to the banks, so the initial fee of a consultant can be offset by this. A good consultant will highlight both positives and negatives of each provider.
Change in rules
In the UAE, the mortgage cap for first-time homebuyers is due to be changed to 80 per cent of the purchase price for UAE nationals and 75 per cent for expatriates. Second and third-home loans for Emiratis will be capped at 65 per cent of the purchase price and 60 per cent for expatriates. This change in mortgage cap is aimed at minimising speculators to avoid another property crash similar to 2008. However, it also deters genuine property investors as it may not be easy for potential buyers to produce that amount of spare cash.
Interest rates
Another cost to consider is interest rates. Current rates in Dubai range between 6.5-8.5 per cent depending on the finance type, the lender, the project and the down payment. These rates are nearly double those of many other countries. Australia currently has a rate of 3.75 per cent, China is at 5.31 per cent, India is at 4.75 per cent and Canada and the US are as low as 0.25 per cent. According to Independent Finance, a consultancy that advises UAE buyers on mortgages, the five most active lenders are Mashreq Bank, Dubai Islamic Bank, ADCB, RAK Bank and Standard Chartered, with average monthly repayments ranging from Dh13,504.14-Dh16,104.54.
A factor to consider when looking for a mortgage that will lead to least amount of interest is the difference between a fixed rate or a standard variable. An adjustable loan, also known as floating or variable rate mortgage, offers interest that is tied to an index and the underlying market conditions, so monthly loan repayments fluctuate. A fixed loan, on the other hand, offers interest that remains unchanged for over a certain period.
In the UAE, fixed rate mortgage is a relatively new trend, as most lenders offer home loans based on internally-set rates or Emirates interbank offered rate (Eibor), the rate at which banks borrow money from each other.
This year, concerns
were raised that loan repayments could increase sharply after several banks decided to drop Eibor and set their own base rate. n

loan basics

1The first step is to take a pre-approval from the bank. Documents required include a passport copy and visa page, salary certificate addressed to the bank, bank statements for the past six months from your personal account, details of all liabilities and copy of the title deed with floor plan. The bank issues a pre-approval letter in three to five working days.

2 The buyer and the seller along with their respective agents sign an MoU, which states the time for completing the property transfer. The buyer generally issues a 10 per cent down payment cheque in the name of the seller that is held by the seller’s agent. It is cashed only if the buyer backs out of the deal.

3The buyer then needs to send all the above mentioned documents to the bank to obtain a final approval letter.

4 The final mortgage approval letter is issued after the bank receives the valuation report. The process takes five working days.
The buyer will have to hand over three to four undated monthly instalments as security cheques along with one cheque totalling the value of the property.
The bank will also open a savings account for the mortgagor from where it will debit the EMIs every month.

5 Most of the developers now want the buyer to provide them with a no-objection certificate (NoC) for title transfer and mortgage registration from the bank.
— A.L.