Mortgage takers will have some serious calculations to do on their down payment requirements as prices keep rising. Image Credit: Shutterstock

Affordable luxury is always in high demand in Dubai. For homebuyers, it is an opportunity to own a high-quality home in a community that provides a desirable lifestyle.

For investors, it is a solid source of rental income that comes at a relatively lower purchase price. Some of Dubai’s newest communities – Dubai Hills Estate, for example – had offerings that fell firmly into the affordable luxury segment when they launched.

By affordable luxury, I mean a property that is priced at less than Dh5 million, though typically we would be looking at Dh3 million or less. As Dubai’s property market boomed over the past couple of years, the dynamic of the market has shifted as well.

Communities such as The Springs in Emirates Living or Maple in Dubai Hills Estate, both once considered affordable luxury, have been upgraded to the prime bracket with more properties coming to market at around the Dh5 million mark.

Loan-to-value mismatch

What does this mean for buyers and investors? The type of homes that have increased dramatically in price are the ones that are upgraded, have interior and possibly exterior renovations, are offered furnished, are in a very prime location, and so on. They’re not really investment properties – these are very much family homes that end-users would buy for themselves and quite often, they may require a mortgage.

For properties priced under Dh5 million, the loan-to-value (LTV) ratio on a mortgage is 80 per cent, and drops to 70 per cent for properties above that. The additional 10 per cent can be a significant jump to make for a homebuyer in terms of the deposit.

As an example, if a villa at Dh4.9 million is now priced at Dh5.2 million, a buyer is looking at an additional half a million dirhams need to cover themselves. At that point, it’s not about how much the property is worth, but how much extra it’s worth. Is it something that they would want to stretch their budget for?

Those few Dh100,000s

Once they move past that hurdle, it gets a bit easier. A buyer who is already in a space where they can afford to finance a Dh5.2 million purchase could just as easily look at Dh5.5 million or Dh5.8 million because the increase in deposit isn’t as steep. They have already gotten comfortable with the idea of paying 30 per cent, which makes that an easier pill to swallow.

That space between the properties just below and just above Dh5 million is where things tend to get interesting, and it’s where we are really seeing a lot of movement. That’s also where the role of a private client advisor becomes extremely important – we cannot just be brokers who are trying to sell a property in order to earn our commissions.

We have to guide and advise our clients so they can find the right property and make sure that they are paying a price they are ultimately comfortable with.

Ultimately, it is up to the buyer to manage their budget and to decide if it’s worth taking the extra leap. Homebuyers, especially first-time homebuyers, tend to extend themselves a bit when purchasing a home.

Stretching resources

That’s just human nature, I think, to want the absolute best for yourself and your family even if it comes at a premium. But the risk in a buyer pushing their budget isn’t necessarily in the price that they’re paying.

Rather, it’s in the future payments they will have to make. It can be tempting to take on a mortgage because it will help to cover the purchase price now, but the question any buyer should be asking themselves is – how confident are they in their lifestyle and their ability to maintain regular loan repayments?

If they were to hit a difficult patch in their lives, would they still be alright financially?

This year, we are expecting prices to continue growing across the city, which will add to the tension that exists in the Dh5 million bracket between what buyers can afford and how much they need to stretch their budgets. It won’t be quite as significant a factor for cash buyers, but anyone considering a mortgage will need to weigh their risks very carefully.