200314 rent or buy
Should you rent or buy a home? UAE residents, experts offer six tips to help you decide! Image Credit: Shutterstock

Dubai: The pandemic situation has created a high demand among the residents to upgrade the sizes of their homes for better living. Attractive property prices and favourable mortgage interest rates have further fueled people's desire to move into a self-owned home instead of a rented house.

Long-time Dubai resident Anjana Ravi has recently moved into a townhouse villa in Nshama Town Square, located along Al Qudra Road. She plans to live in this country for several more years; so, she invested in a property after carefully considering that such a decision would help her enjoy a comfortable life in this city.

Anjana Ravi with family
Anjana Ravi with her family

Tip #1: Capitalise on the attractive property rates

Ravi wanted to capitalise on the attractive rates offered in real estate. “This year in February, we bought a three-bedroom townhouse priced at Dh1.37 million in Nshama Town Square,” said Ravi, a business development manager at an IT firm.

“We wanted to move into a bigger space with a private backyard to do some farming and gardening. This home has a private backyard and ample space, maid's room, storage and laundry room, serving all our needs. Our house also offers fantastic scenes of the desert; we get beautiful views of the sunset and dazzling stars in the dark sky.”

The place is a lovely community with all amenities - three supermarkets, a park, a swimming pool, tennis courts, everything you need to live an active and comfortable life, she added.

Tip #2: Evaluate finances to determine your mortgage eligibility

Ravi purchased the home on a mortgage, as they could not afford to pay for the total house value in cash. “We evaluated the finance requirements, did our entire calculations to find out the amount we were eligible to receive as a loan. We realised the EMI we would pay is similar to our rent that we were currently paying for our two-bedroom apartment in Deira,” she explained.

Her initial payment for the house was 20 per cent of the home value to get a mortgage, plus six per cent – DLD (Dubai Land Depratment) charges and agents commission. She said, “We had to bring around Dh500,000 from India to make the initial payment and get the contract signed.

“The mortgage was worked out for us through a financial mortgage consultant. Being a salaried person having worked in a company for more than one year, and having the required minimum salary eligibility to qualify for the loan, we were able to attain our dream of owning a home in Dubai.”

Tip #3: Invest in a good community, not just a home

Ravi recommended every home buyer must think beyond the unit and consider investing in a good community with the right amenities to enjoy a good lifestyle.

Consult a good professional agent who can advise you on the right property. It gives a satisfying feeling to see your asset value appreciate when you live in it, she added.

Sarkar Chauhan

Indian businessman Sarkar Chauhan purchased a four-bedroom villa in Arabella 2 in Mudon, a development by Dubai Property. He checked several communities and Arabella ticked all the boxes of his requirement.

“The Arabella community has open, airy spaces for the kids to play. The house is designed to get maximum natural light, and the community is laid out in a way that builds and encourages interaction with the neighbours. Since we have friends also living in this community, it further encouraged us to buy a home in this place.”

Tip #4: Get a mortgage with favourable interest rates

Before the pandemic, the housing market (especially on townhouses and villas) offered a good discount that made Chauhan decide that it was the right time to shift from a rented house to a self-owned home.

He had the option of paying all upfront or pay half and balance take a mortgage. “Since the interest rate offered by the bank was attractive, I opted to take 50 per cent of the property value as a home loan on a fixed interest rate,” added Chauhan, who is the managing partner in a freight forwarding company in Dubai.

"Dubai is home for us, as we are here for a long term stay. With the option to buy the house at attractive interest rates available, I felt that the money being spent on the rented villa in Mirdiff [Dh120,000 annually] could be better utilised towards the monthly instalment of my own house. It allowed me to build an asset for my family,” he said.

Picture used only for illustrative purposes. Image Credit: Stock image

Matter experts weigh in as well

Ian Vaughan, senior mortgage consultant at Mortgage Finder said that, currently; mortgage rates are at historic lows and seem set to remain so for the foreseeable future.

Vaughan added that the change in loan-to-value ratios introduced by the Central Bank of the UAE in 2020 further allows the expat buyers to buy home with only a 20 per cent down payment, rather than the 25 per cent as previously required.

What is loan-to-value (LTV) ratio?
An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at Dh100,000 for its appraised value, and make a Dh10,000 down payment, you will borrow Dh90,000. This results in an LTV ratio of 90 per cent (i.e., 90,000/100,000).

“Although 5 per cent may not seem a lot when put into context, it can represent significant savings in terms of the funds required upfront. For example, if we consider a property costing Dh1 million, a buyer now will need Dh 50,000 less upfront for their down payment as the loan-to-value requirement has reduced the down payment amount from Dh250,000 to Dh200,000,” Vaughan explained.

Ian Vaughan

Vaughan added that the additional fees needed for buying a home - approximately 7 per cent of the property value, can also be included within the mortgage loan, reducing your amount of upfront cash required at the time of purchase.

Dhiren Gupta, managing director 4C Mortgage Consultancy, said banks are also offering freebies to loan takers. These include a zero pre-approval fee, zero processing fee, and discounted property valuation fee and the life insurance premium cost is also reduced substantially under new insurance regulations.

"All these elements have incited the mortgage market, which is further catalysed with lucrative offers from the property primary and secondary markets," said Gupta.

Dhiren Gupta

"The prevailing interest rates with low or zero processing cost, mortgage purchase still seems a lucrative option for homebuyers in the current competitive property price market. However, the mortgage is a long term and significant monthly obligation in your budgeting; hence you should be aware of your financial commitments and take bankers or good mortgage consultants advice."

If you have strategically prepared with your finances, and the loan will not deter your lifestyle, then mortgage purchasing over renting is your better option.

Picture used for illustrative purposes.

Tip #5: Determine your stay time to decide between renting vs buying

According to Ayman Youssef, vice president, Coldwell Banker UAE, when individuals plan to live in the UAE for a short period, renting is more viable than buying a property. When you have a mid to long term plan (5 to 10 years) in Dubai, it is better to buy than rent, Youssef added.

Ayman Youssef

“Generally, buying is better as the monthly instalment will contribute to buying equity rather than just paying a landlord. So, if you have the initial funds required, stable income, mid- to long-term plans in Dubai, then consider buying.”

He added that it is always good to have a plan B set in place, “That is if in the future, you decide to move out of the country or decide not to live in the property, you need to know how likely the property can get rented at an attractive price and give you a good yield.”

He explained you need to evaluate if the property gives you positive leverage on your investment. “For example, if your monthly instalment is Dh 5,000 and can rent the property for Dh6000 per month, then it's positive leverage. Therefore, buyers should always go for desirable locations with good demand, occupancy rates, and strong yields.”

Zhann Jochinke, chief operating officer, Property Monitor further pointed out that the longer you stay, the more you spread out the one-time acquisition costs over the years.

Zhann Jochinke

“The money you would pay in rent has provided you with a place to live and is used to pay off your mortgage. And you have built equity, as the property value is likely to appreciate, Jochinke said.

“Globally, over the long term, property prices tend to go up. There are market cycles with highs and lows. These typically last 5 to 7 years, and after each cycle, the market recovers and finds a new high. If it is unlikely for you to stay in the property for at least 4 to 5 years, then renting is a safer option.”

Tip #6: Evaluate monthly costs in renting vs buying

Jochinke said, with renting, you must consider the monthly rental amount plus any anticipated minor maintenance. “You as a tenant would be required to pay, as mentioned in Dubai tenancy contracts, 'anything under X amount will be paid by the tenant, and anything over that is payable by the landlord'.”

“With homeownership, consider the monthly mortgage payment (principal and interest), the service charges for the building or community as a monthly amount, and the total cost of any minor or major maintenance that may arise,” he said, while adding not to include any standard occupancy costs, like utilities, as these are the same regardless of renting or owning.

Jochinke said that once you have figures for both of these scenarios for the same property, you can compare. “If the numbers are roughly similar or lower for owning, buying becomes more favourable. Currently, with mortgage interest rates at historically low levels, and property prices at the bottom of the current market cycle, the scales are likely tilted in favour of ownership,” he added.

Illustration comparing costs

For example, Jochinke explained, consider a four-bedroom villa in XYZ community; currently, the rental cost is Dh200,000 per year or purchase price is Dh 4 million, and the would-be owner or renter will occupy the home for the next 5-plus years.

Rental costs:

• First year rent - Dh200,000 yearly

• Minor maintenance issues during the year - Dh1,500

• One-time brokers commission - Dh10,000

Total rental costs = Dh211,500 annually (or) Dh 16,792 monthly

Purchase costs:

Based on 25-year mortgage with 3 per cent interest and a 20 per cent down payment):

• Mortgage payment Dh15,175 per month

• Service charges Dh2,500 per month

• Minor maintenance issues during the year Dh6,000 (Per month cost of Dh500)

Total purchase cost per month = Dh18,175

Acquisition costs:

• Broker commission (2 per cent) = Dh84,000

• Dubai Land Department transfer fees (4 per cent) = Dh160,580

• Registration Trustee and related fees = Dh5,000

• One-time mortgage-related fees = Dh19,000

Total acquisition costs = Dh268,580

Down payment required = Dh800,000

Total funds required = Dh1,068,580 (26.7 per cent of purchase price)

In this example, Jochinke explained buying comes in slightly more expensive monthly when compared to renting. It will require over Dh1 million to make the purchase. “However, if we were to expand this example out over ten years and factor in property price appreciation, expected rent increases, inflation, and other factors, you will find that purchasing a property comes out ahead financially over renting.”