Forward Planning: Long-term mortgages in UAE becoming more common

The construction business is booming. Housing units and appartments are offered in many places, by the beach, in the desert or even in the sea like the Palm Islands. The average prices are very reasonable and affordable for anyone who pays already a rent of Dh35,000 or more.

There is no reason to waste rent money when you can buy your own home. But buying a home is the biggest and most important investment one can make. Mortgages and loans may extend to a very long period of time, even up to 30 years and there are the worries of not being able to make the regular payments due to death or disability which entails the possibility for the family of loosing the house.

This problem is answered by life insurance which provides mortgage protection or early mortgage redemption. Mortgage Payment Protection Life Insurance exists for many years, providing - for the entire duration of the loan - full payment of the remaining balance of the loan in case of death and ensuring regular payments for a limited period of time (from one to three years) in case the policy owner becomes disabled.

In countries with a tax system the same type of life insurance is a great financial vehicle to accumulate money tax-free. At some point in the future, the cash value can be used to pay up the mortgage earlier and reduce the loan interest payment resulting in extra savings. Some type of life insurance cash valued products - traditional or investment - have a minimum guaranteed interest rate of around 4 per cent. Looking today at interest rates of 1 to 1.5 per cent make the policy holders of such products glad for having these saving plans and financial protection. Maximum contribution and extra payments in these plans provide a long term safe and secured investment account.

Term life insurance is used mainly for mortgage protection with no money accumulation or cash value and can be purchased with a little premium against a large sum insured (face amount). Decreasing term insurance is the most suitable mortgage protection and a very affordable type of term insurance.

Long term mortgages are becoming more common in the UAE especially with the huge property development happening in Dubai and Sharjah. Bank loans and mortgages are offered for periods of 7, 12, 15, 20 and 25 years. Previously mortgages were given for 5 or 7 years maximum, with an average interest rate of 12 per cent, which made it impossible for many to own their own home. With longer mortgage periods new individual life insurance products need to be introduced in the market.

As a matter of fact most of the UAE residents need long term life insurance with saving and investment options rather than short term endowment policies. Endowment insurance plans are more expensive and only for short or medium periods.

A new life insurance has been introduced in the UK market a while ago which provides mortgage protection in case of unemployment or disability (due to accident or sickness) of the policy owner. Indeed in UK today 32 per cent of mortgage payment defaults are related to sickness or unemployment. One of every 11 working people are claiming sickness benefits and nine out of those claimants do not return to work for at least 6 months.

Also on average any person has a one in 100 chance of being redundant and about 650 workers are being made so every single day. The usual mortgage protection life insurance provides protection in case of death or disability only.

What is unique and different about this new product is that it protects mortgage payments in case of unemployment or disability too. If the policy owner is made redundant or becomes disabled due to sickness or accident the insurance will pay for the mortgage and the insurance premium for the entire selected period which has a maximum limit of 24 months.

New insurance products of that kind are very much needed here to meet the UAE residents' changing social, economical and living environment. We musn't think short term only any more, so let's find the right financial solutions.

The writer is a UAE-based insurance consultant and director of Gulf Insurance Consulting