Terms and conditions apply

With the real estate market in recovery mode and many mega projects under way, investors are thinking of buying property again. But it is not as simple as it sounds, and it becomes tougher when you have no idea about the processes involved in applying for loans and mortgages. To help you sail through it smoothly and smartly we give you tips and tricks to deal with the financial and banking aspects of funding.

Longer repayment period

Steve Gregory, Cert PFS, Managing Partner at Holborn Assets Limited, an international financial services adviser, says if the mortgage tenor is long, lenders make a greater amount of profit or interest. “Loans are given only on a repayment schedule in the UAE, unlike the possibility of interest only in some parts of the world. Since the loan interest and the repayment instalment must be made together, a shorter repayment period means a bigger mortgage repayment. Thus, people often look for a longer repayment period. It is unlikely to find a mortgage lender who will lend you beyond the age of 65 years at the final instalment, which means you have to repay the loan faster if you are above 40, as most loans are for 25 years.”

Sunil Saraf, MD, Tanjay Real Estate Brokers, says every borrower should decide on the duration of the loan based on what suits their needs. “One should look at one’s repayment capability without stretching his ability to put a reasonable down payment so that one is not burdened by the high EMI. A balancing act has to be made between the duration and down payment.”

Fixed-rate rules

Fixed rate allows buyers to avail of a secured locked-in interest rate for the chosen term period. When fixing the mortgage term you need to be aware that there are likely to be substantial penalties if you wish to repay or make a significant reduction to the outstanding balance during the fixed rate period, advices Paul Jude, Wealth Manager at Global Eye, an independent firm of advisers providing financial solutions. “This is due to the lender usually hedging the rate by taking out an interest rate swap in the market, which they must continue to pay until its maturity. While some lenders will allow a reduction of up to 10 per cent of the outstanding balance without penalty during the term, you should check the terms and conditions. There is also likely to be an arrangement fee for taking a fixed-rate option.

“While fixing the rate, ideally at the time of low interest rates, can help provide certainty of your monthly repayment, you should only commit to this if you are unlikely to be in a position to repay the loan during the fixed-rate term. Also, make sure that you are free to move to another fixed-rate option on expiry, should you wish to do so,” says Jude.

Guarantors for a loan

Guarantors can enable a loan to be made when the bank considers the risks to be too high for clients, adviser Gregory. “There is a danger in doing so because the bank has assessed an unusual risk and guarantors need to understand this.”

Jude explains, “If a family member provides a guarantee, which is supported by a charge on their own assets, possibly their own home, they are putting that asset at risk in the event of default by the borrower. They may have to make up for any shortfall if the primary security (the borrower’s property) sells for less than the value of the outstanding loan. If they do not have other assets to sell or have difficulty raising a loan against their own to meet this shortfall, they may have no other option than to sell it. Anybody asked to guarantee a loan should have an understanding of the risks and seek independent legal advice before doing so.”

Jean-Luc Desbois, Managing Director, Home Matters, says, “If the guarantor is a parent then their age can restrict the mortgage term and increase repayment levels.”

Low introductory interest

Lenders offer attractive introductory rate loans, but it is essential to watch out for restrictions or exclusions on other aspects of the loan. Gregory says, “There are discounted (low) initial rates, fixed rates and variable rates. Sooner or later, most likely the variable rates will apply to the mortgage. Ask the bank for its current variable rate as well as any other rates on offer.”

Desbois advises that if you are in doubt, seek independent advice from an impartial professional. “As long as you know the terms and conditions, most mortgage products these days are reasonably priced,” he says.

Insurance schemes

Jude says these schemes may be helpful in case of an event when you are unable to work due to an accident or ill health. However, check the conditions carefully. Jude says, “Many will only pay off after a certain period of time, typically six months and only for a set period of time, usually 12 months. While this may be long enough for a borrower to get back on their feet, this isn’t always the case. If this is a concern, it is usually preferable to arrange stand-alone income protection in the event of long-term sickness, and consider critical illness cover for the loan amount. The latter would repay the outstanding balance after diagnosis of such a condition, within certain criteria. It is recommended that you always arrange life insurance for all parties to the loan to repay the borrowing in full, even if it is not a condition of the loan. This will help protect your family and keep a roof over their heads, which is mortgage free should anything happen to you or your spouse.”

Excessive credit

Excessive credit is almost as bad as no credit or even bad credit. Saraf says, “Even if you pay your bills on time, lenders tend to focus just as much on how much credit you have available with you, as they do on timeliness. So being up to your ears in car loans and credit cards is a sure way to be turned down for a mortgage. Postpone any big-ticket purchases until after you buy your house.”

Read the fine print

Understand all costs for taking a loan such as processing fee, valuation fee and any other hidden costs involved in either taking a loan or while paying off the loan, says Saraf. “What are the clauses for paying some principal amount in between the loan term? Some banks do not allow this. Hence, one has to be mindful of the clauses to keep away from future risks.

Jude suggests taking time to scout around rather than accepting the first deal that is offered. He says, “Speak to a mortgage broker to compare options. It might seem easier to go with the first offer, but just as your property purchase is important to you, so is the loan that goes with it.”