Currently, home purchases in Dubai are running neck and neck between cash deals and those featuring mortgages. Home finance rates at historic lows have helped. Image Credit: Pixabay

Dubai: Planning to take a mortgage to buy a home in the UAE? It’s time then to make up your mind because the current low home financing rates will see increases next year onwards.

Many in the UAE had already made up their minds, as is evident from mortgage-backed home sales making up 50 per cent of the overall during the last six months. These homeowners have thus taken advantage of mortgage rates at or around the 3/3.5 per cent mark – as well as the fact that property values are still at most locations way below their 2014-15 peaks.

Holo's founders Michael Hunter and Arran Summerhill give the pros and cons on mortgages and the best options available. Irish Eden R. Belleza and Ahmed Ramadan/Gulf News

But that run is coming to an end. Home prices across locations are stabilizing or showing signs of steady increases. Market sources say two prime end-user locations – Dubai Marina and Downtown – will likely see prices go up at some point in 2022.

On the mortgage side, the US Federal reserve has indicated there will be more than one rate hike, and which immediately jacks up home finance costs here.

There is also a third element – the UAE Central Bank recently announced that will keep close watch of local banks’ real estate related lending, which includes those issued as mortgages. “Higher regulator scrutiny immediately means that banks will turn conservative when it comes to lending on all types of real estate financing,” said an industry source.

So, what options are there for someone wanting a mortgage now?

What should a first-time buyer do?
Opt to take a longer-term fixed rate of between 3 and 5 years with a low follow-on rate - that's the suggestion put forth by Holo's founder Michael Hunter.

"This allows you to budget for the longest term possible and mitigate risk in any changing circumstances or unexpected bills. Although variable rates can be appealing - as we are in a low interest rate period - we can assume that rates are only likely to increase and would be cautious to take a product like this in the current market."

Stick with fixed rates

“We are seeing more people opt for a fixed rate over a variable rate at the moment,” said Arran Summerhill, co-founder of Holo, the mortgage-focussed online portal. “In 2021, we have seen 60.1 per cent of Holo applicants opting for a fixed rate - this is new purchases and also people looking to refinance.

“With the security that fixed rates offer, they offer a very good option for people who are looking to budget for a set period of time. Lenders are also favoring fixed rate products at this time with more options available from the banks than variable deals.

“The fixed rates vary anywhere from one to 15 years; however, we see people looking at the mid-term options from 3-5 years, with a plan to then assess their deal at the end of the fixed rate period.”

Stock - Holo Founders
Arran Summerhill and Michael Hunter, co-founders of Holo, based in Dubai. "This is the ideal time to look to refinance your existing homeloan. Many people are on rates which are way above the current market rates and could benefit from switching to a cheaper deal," said Hunter. Image Credit: Gulf News/Ahmed Ramdan

Pick the best rate

There are mortgage rates being advertised for under 3 per cent from ADCB, while Emirates NBD has pegged it at just over 3 per cent. Other leading local lenders have it at the 3.50 per cent mark.

In the recent past, “Lenders have moved to counter some of these low rates by implementing a floor rate,” said Michael Hunter, co-founder of Holo. “This means that regardless of the market conditions, the rate will not drop below this floor rate. This ensures a certain level of security for lenders.”

“Since the start of the pandemic, we have seen a large percentage of owners buying their second property or upgrading to a larger property by selling their existing property. We can assume this is based on the lower cost to purchase, including purchase prices and interest rates.

“This number has now slowed down with mainly new buyers coming into the market. If you currently have a mortgage and looking to take a mortgage on a second property, your loan-to-value will be 65 per cent for Emiratis and 60 per cent for expats.”

  1. Other factors that home buyers should consider beyond interest rates relate to the fee finance, over-payment allowance, and offset accounts.
  2. Some lenders will assist in adding a percentage of the associated costs of buying to the mortgage, thus reducing the initial upfront cash required to buy a property.
  3. This will ultimately cost more in interest outgo, but if managed correctly can be minimal with banks allowing over payments without penalty. This allows you to pay this off sooner.
  4. Offset mortgages can be extremely helpful - some banks will allow you to open an account where you can deposit savings and salary. The total amount held in this account will be offset against the interest on your mortgage and - ultimately - reduces the term of the loan and giving access to the cash when needed.