While investing in your future is important, so is the need to service and pay off a significantly high home loan. When planning for the future, UAE residents have to perform a highly complicated balancing act. While a mortgage needs to be paid off, the other is the need to invest for retirement. Managing the two conflicting priorities is not easy, as both are funded from a limited pool of income during COVID-19.
Given that the overall income levels have dropped this pandemic, if you get the balance wrong, your finances could be barrelling towards a situation wherein you cannot sufficiently meet your money needs. Several UAE residents know all too well the difficulty in finding a balance, as they juggle their careers, while raising a family and managing household expenses, not to mention a steep school or college fee.
Finding a balance between the two
So which should be the first call on your pocket: paying off your mortgage or investing in a pension? Experts say you need to balance the cost of investing in property, against a likely investment return. If mortgage charges 4 per cent a year and expected investment return is 9 per cent, it makes sense to invest rather than paying off debt. If those numbers reverse, then so should your priorities.
It makes sense to take out a mortgage at rock bottom interest rates to invest in property that might grow by double digits year after year, especially if it generated rental income as well. However, with global residential property prices slowing, the argument is not so clear. Nobody wants to end up with debt they cannot afford to repay.
Creating a financial backup first is crucial
Whether you have financial backup if your investment goes wrong should also dictate your decision. Someone with low risk tolerance is advised to pay off debt first. As a rule, experts suggests that a high net worth person with preferential mortgage rates and tax benefits should maintain a mortgage, while middle and lower income families should prioritise paying their debt.
Two thirds of UAE residents still believe property offers the best returns for retirement savings, an HSBC survey showed. By finding the ideal mortgage you can free up money for retirement savings. And there are still attractive deals out there, like on approved UAE properties HSBC offers interest rates starting from 2.79 per cent up to 75 per cent loan-to-value for UAE expats, for a term of up to 25 years.
Property has time and again shown itself to be one of the best asset classes for long-term investors. Although the crisis may put off plans to earn a return on your property now, it’s still ideal for the long term.
How much loan should you ideally take?
Matter experts add that ideally, investors should put down a 40 per cent cash deposit and take out a mortgage to cover the remaining 60 per cent. A small property portfolio with this kind of leverage structure, rented out and properly managed, can build substantial equity over time and be an ideal pension plan. However, it is advised against putting all your investment portfolio in real estate. The ideal investment basket would also include mutual funds, low-cost exchange traded funds (ETFs), stocks and gold.
Two goals can complement each other
Some advisors argue that investing for retirement and paying off your mortgage are complementary goals. Your home is an investment and a store of equity that can be freed when time to downsize. However, it is widely observed that many UAE expats treat property as a short-term investment to sell when they move on, leaving you exposed to short-term property market volatility.
So, you should see property as a long-term investment, despite the current crisis. The decision to pay down your mortgage may depend on if the property is your main home or a buy-to-let investment. Buy-to-let investors should focus on reinvesting, rather than paying down debt, as the assets across your portfolio should have increased in value by the time you retire, and can be sold to pay off the debt.
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Some perks to keep your mortgage going
There may be tax advantages to running mortgage debt. UAE investors in UK real estate, for example, use mortgage debt to mitigate inheritance tax liability, as it's deductible from the net value of estate. With interest rates low, the cost of property investment drops as well, and matter experts view that it will at least be some years before property finance is considered expensive, making it an ideal time now.
If you are concerned, protect yourself with a five or even 10-year fixed rate mortgage, which makes financial planning easier as you know your monthly repayments well into the future, experts add.
UAE mortgage cap law can help choosing
UAE mortgage cap law requires salaried employees to pay off their loans by age 65, or 70 if self-employed, which essentially gives any loan applicant a clear target date, when it comes to retirement. For expats, it capped mortgages to 75 per cent of the valuation for a first purchase and 80 per cent for UAE nationals. Loans above Dh5million are capped further, 65 per cent for expats.
Stringent UAE lending criteria means that for most people repayments are manageable. If you are able to get approved for a loan, the chances are you can afford it. Mortgage rates continue to be reasonable and repayments are typically lower than the rental equivalent on most properties under Dh5 million.
Non-mortgage loans pose bigger risk
The threat isn’t from mortgage, but high-interest unsecured debt such as credit cards and personal loans. So, seek to borrow only to purchase income-producing or value-appreciating assets. Many instinctively focus on paying down debt, but this can be the wrong priority. There are actually many benefits to continuing to carry a mortgage, especially as the interest is currently inexpensive.
Personal factors also play a part, so a conservative investor in a low tax bracket with a high mortgage rate might focus on getting that debt down. However, a younger, more aggressive investor in a high tax bracket with a low 30-year fixed mortgage rate should find investing the better option.