Time is right to consider buying a freehold

Only last week I came across two of my friends who were not sure whether to buy a freehold property or to carry on renting their villas.

They both had good housing allowances from their companies together with good salaries. I could not believe they had not already bought something, as they were both British, who are as we know a nation of home owners.

I went into the pros and cons of buying and renting, and eventually they both agreed it made sense to buy. I shall endeavour to explain my reasoning in this column.

Now that villas and apartments are ready, it is a good time to consider the freehold option, rather than renewing your annual lease. It does not matter how much you are spending on rent as you should be able to buy an equivalent or better property for about the same money on finance.

The deciding factor is how much you have been able to save, if anything at all. This is because you will need to put down a minimum deposit of at least 10 per cent, although a 20 per cent deposit does make it easier to obtain financing. You also need to pay another 3 per cent for commissions and transfer fees, which cannot be financed. That is the first hurdle.

Next, you need to have been working here for at least one year or have references going back for three years. Finally, your basic monthly salary must be more than Dh10,000 and you can only borrow up to 60 times your monthly salary amount.

For example, if your salary is Dh15,000, you could borrow up to Dh900,000. This would enable you to buy a property priced at Dh1 million if you put a 10 per cent deposit down or Dh1,125,000 if you pay a 20 per cent deposit .

Let us assume you are putting a 20 per cent deposit down, for the rest of this exercise. The prices include the premium, as Amlak and Tamweel now lend against these, (although an independent valuation is required first).

So assuming you can meet the above three criteria, you are in business. Now for the mathematics. It is easier if I give an example.

Let us say you live in Jumeirah and your rent is Dh140,000 for a four bedroom detached villa. Your salary is Dh30,000 and the company pays your rent. Whether you pay, or the company pays, makes no difference to the maths.

We all agree money spent on rent is money out of the window. In the same vein, money spent on interest is also wasted. The latter, however, does enable you to access a lump sum of money, ie, the mortgage finance, in order to buy a property of your own in the first place. So how much will Dh140,000 in interest payments allow you to borrow?

Options

Assuming the current rate of 7 per cent, this would give you a lump sum of Dh2 million against a property purchase. You would need to put up a deposit of Dh500,000, ie, 20 per cent, giving you a total budget of Dh2.5 million.

This would buy a four-bedroom villa, type ten in the Meadows with 4,207 square feet of built-up area and overlooking the golf course. Alternatively, you could opt for a five-bedroom villa, type seven in the Meadows with 3,805 square foot built up area and a partial lake view in other words, a better villa than you are currently renting at Dh140,000, especially as rents have now increased by an average of 25 per cent over last year. This works in almost all price ranges.

Sceptics would argue your overall annual payments would be higher in this case than your rent, as you have to pay back the capital as well. That is true, but the extra payments over and above the interest element are used to reduce the debt, and could be regarded as a form of saving.

You benefit directly from this as the interest amount would also reduce each year, thereby reducing the interest and hence throwing less money out of the window known as a reducing balance loan.

You could of course include the capital payments, so you do not increase your outgoings, but this would reduce your borrowing power. On the other hand, as rents are increasing, the amount of money being wasted goes up each year anyway. On top of this, the value of property in Dubai has soared and is likely to keep on going up in the foreseeable future, (although not quite as fast as previously).

So when you sell your property, say in five years time, you will have made a gain of probably at least 50 per cent, equating to Dh1.25 million. You will have paid interest of only Dh700,000 in fact it would be less, as the debt would be decreasing and hence the interest would also decrease and you will have made a total gain of Dh425,000 and lived rent free for five years. Not bad.

The other option is to continue paying rent of Dh140,000. Assuming you have a very understanding landlord who does not increase the rent, then in five years time you would have paid out Dh700,000 and have nothing to show for it. The bottom line is, overall, you could be Dh1.125 million better off. Even if the property only increased by five per cent a year, (which is highly unlikely), you would have still made a gain of Dh625,000.

Service charges, which are an extra expense not incurred when renting, can be offset against the impending municipality tax.

The percentages work for any properties, from studio apartments for Dh400,000 to large villas for Dh5 million and above.

Sceptics would ask: What if the property market crashes or interest rates rise? Of course, this is a possibility, as has happened in the United Kingdom, but markets, historically, have always recovered.

If you feel confident prices will continue to rise over the long term, then do not wait any longer buy as soon as possible. Even if your rental contract has some time to go, there is a shortage of rental freehold and you could let out your new property until your rental contract expires and you are ready to move in. Wait for six months and I can assure you that you will have to pay more for the privilege of owning your own home.

On that note I rest my case of course, the final decision is yours.

The writer is managing director of Best Value Property Consultants.