Property purchases: Are your developer’s payment plans now better than bank loans?

Dubai: With more tentative tenants in Dubai once again looking at buying a home, developers are rushing in with payment models that can meet buyers’ expectations without straining their budgets. But is it better than the conventional means of getting financing via bank mortgages?

“There are many potential homebuyers who were hoping that dropping interest rates would make their mortgage plans less expensive,” explained Stephanie Myrtle, vice president of a Dubai-based real estate research firm.

“This is why developers in Dubai are gunning for 1 per cent monthly payment plans. That is, if property buyers can be convinced this would be less expensive to pay off than taking a mortgage. That’s what they need to find out first as per each of their respective financial situation.”

What type of payment plans are there?

When purchasing a ready or property, which is available for purchase before it has been constructed, the payment terms are split into instalments which must be paid in several intervals. In the usual payment plans, buyers would complete payments of the entire unit upon handover of the property.

“With post-handover payment plans of 3 years or more, the return on investment (ROI) in the first three years is something that attracts investment, and then the rental income helps in paying off the future instalment,” said Prakash Bhat, a real estate, and mortgage consultant based in Abu Dhabi.

“Also, as far as monthly instalments are concerned, developer funding is more viable. In these payment plans, you must pay a fixed monthly amount for the entire loan duration. You don't have to worry about the amount increasing. Banks, however, only offer a fixed interest rate for a fixed term.”

How to decide on better payment option?

Tip #1: When taking a mortgage, ensure your net rental return is higher than the interest payable.

For taking a mortgage, ensures the net rental return after paying the service charges payable to the developer is higher than the interest due on the mortgage. "It allows to make some money during the mortgage period, and after 15 years, once fully paid,” Bhat added.

“Buying villas and townhouses on a mortgage is more cost-effective as there is high demand for such assets in today. The rental incomes on villas and townhouses are higher as the service charges are lower, so when paying in bank or mortgage instalment payments per month, one can absorb this cost.”

Tip #2: Save with payment plan option on absence of interest, other charges for obtaining loan

The main perk of buying on the developer's payment plan is that you don't have to pay any interest to the bank. “Also, you save on insurance and bank charges like mortgage registration fee, and costs on an early settlement of the loan, if you want to exit from the mortgage pre-term,” Myrtle added.

Tip #3: Evaluate the opportunity cost of the money when deciding on the mode of payment

Both Bhat and Myrtle recommended that every investor understands the money's opportunity cost that is being invested in the asset. Opportunity cost is simply the loss or the benefit that could have been enjoyed if the best alternative was chosen.

In other words, opportunity cost is the forgone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs, and benefits of every option available must be considered and weighed against the others.

Key takeaways

For any homebuyer choosing from a mortgage or payment plan is based on your financial state and future obligations to manage the finances. “Your cash flow determines a mortgage buy and a post-handover payment plan. With a payment plan, repayments are higher than a mortgage as they are covered over a shorter period and on a lump sum due every quarter,” added Bhat.

“On the other hand, a mortgage, the payments are spread over a longer period, up to 25 years, and are payable every month. Also, developer discounts encourage buyers to cover final handover payment in cash or pay via a bank mortgage. However, with the payment plan, you don't get any discounts.”

This means, in some cases, the buyer pays less for the property if they do not select the payment plan option. This is when it can help to initially take a payment plan with a developer and then move this onto a mortgage later.

So, which do you choose? “Developer financing has an edge over bank loans now. Not only will your loan stay with the same company for the entire term, but a mortgage firm can also offer faster closings and more availability of realty. But the individual’s finances are often the most important aspect of home loans.”