Navigating your financial resources to purchase your dream home in Dubai might be challenging, especially when faced with budget constraints. That’s where a mortgage comes into play; it enables you to buy property in Dubai without having to make the full upfront payment.
Furthermore, with a mortgage, you have the option of repaying the borrowed amount over time via a series of regular payments.
Don’t know what goes into choosing the best mortgage to buy your dream home? Fret not; in this guide, we will explore different types of mortgages in Dubai, providing insights to help you choose the most suitable option to finance your next real estate investment in Dubai.
6 Different Types of Mortgages in Dubai
Here is a comprehensive overview of various types of mortgages in Dubai that potential homeowners can choose from.
1. Remortgage
Remortgaging, also referred to as refinancing, involves securing a new loan to replace an existing one. It can be for the same amount or more.
This process includes replacing or settling your current home loan with a new one, often done to release equity from a property for alternative purposes.
Also, a loan renewal can be categorized as a remortgage if the second loan amount matches the balance on your existing loan.
Pros of Remortgage in Dubai
- Remortgaging offers the opportunity to quickly repay with improved repayment terms.
- Cashing out some amount from your home equity is possible through remortgaging.
- Lower monthly payments can be achieved by remortgaging into a mortgage with a reduced interest rate or when EIBOR falls.
Cons of Remortgage in Dubai
- It is a time-consuming process.
- If you remortgage prior to the end of the current mortgage, you may have to pay a penalty.
- Also, a remortgage has the potential to increase the mortgage length and monthly repayments. It may reduce the monthly income available for other expenditures.
Who is it best for?
Remortgaging is ideal for individuals seeking:
- Reduced monthly payments
- Lower interest rates
- To access the equity in their property
2. Investment Mortgage
An investment mortgage serves as the financial means to buy a property intended for investment purposes.
Whether the goal is to generate a rental income or resell a home for profit, securing a loan for real estate investment in Dubai can prove to be a lucrative venture when approached with caution.
ALWAYS REMEMBER THAT IN SUCH CASES, INVESTMENT PROPERTY PERTAINS TO MULTI-UNIT BUILDING WITH 2 OR 4 UNITS OR A SINGLE-FAMILY UNIT.
MOREOVER, DIFFERENT REGULATIONS APPLY TO COMMERCIAL REAL ESTATE, INCLUDING APARTMENT AND CONDOMINIUM BUILDINGS WITH 4 OR 5 UNITS.
Pros of Investment Mortgage in Dubai
- Profits generated from an investment property can be used to settle both the principal and interest on your loan.
Cons of Investment Mortgage in Dubai
- Investment loans generally have more rigorous underwriting standards compared to commercial or residential mortgages.
- The availability of lenders for investment mortgages is limited due to the risk of default.
Who is it best for?
This mortgage option is suitable for individuals seeking to generate income via property rentals or secure a residence for personal use.
3. Variable Rate Mortgage
The interest rate in variable mortgages may fluctuate during the repayment period based on market conditions. Thus, borrowers might secure a favorable deal or face a higher rate depending on the circumstances.
Moreover, if you plan to opt for this type of mortgage in Dubai, ensure you have the financial flexibility to manage potential increases in repayments.
Also, variable interest rate mortgages typically span a 25-year term.
Pros of Variable Rate Mortgage in Dubai
- A decrease in EIBOR results in a lower interest payment on the mortgage.
Cons of Variable Rate Mortgage in Dubai
- Challenges in budgeting arise from interest rate fluctuations.
- An increase in EIBOR leads to higher interest rates, subsequently causing increased monthly payments.
Variable rate mortgages are categorized into two types:
- Capped Mortgage
- Discounted Rate Mortgage
Capped Mortgage
In Dubai, mortgages include capped mortgages, offering borrowers certain advantages. Payments are made at a variable rate, but a maximum cap is established at the start of the loan term.
Typically, the capped period is limited, ranging from 2 to 5 years. Albeit interest rates may rise based on market conditions, there is a specified limit beyond which the rate will not increase.
Pros
- Even in the event of an EIBOR increase, monthly repayments will not exceed the cap.
- You can enjoy reduced repayments if EIBOR declines.
Cons
- Finding capped mortgages can be challenging as they are hardly offered by official lenders.
- It costs more since you need to cover the cost of the security provided by the cap.
- There is a penalty for early repayment if you fully settle your repayment or switch to an alternative plan.
- Despite the interest cap, interest rates can still increase due to a rise in EIBOR, but they won’t go beyond the capped limit.
Who is it best for?
A capped mortgage is suitable for individuals looking for repayment stability.
Discounted Rate Mortgage
It is a type of mortgage that features an interest rate set at a percentage below the lender’s base rate.
Hence, discounted rate mortgages are typically offered as introductory loans to first-time property buyers by official lenders.
In this type of mortgage, borrowers get a discount on the lender’s established interest rate, and they return the amount at this reduced rate for a duration ranging from 2-5 years.
Nonetheless, keep in mind that the interest rate may change based on the market conditions once the period of the discounted rate ends.
Pros
- A discounted interest rate is set lower than the lender’s base interest rate.
- If EIBOR decreases, you will pay an even lower interest rate compared to the already discounted rate.
Cons
- An increase in EIBOR impacts the interest rate, potentially disrupting your budget for the month.
- As the discounted interest rate period ends, the monthly installment increases when moving back to the lender’s standard interest rate.
- There is a penalty for switching from a discounted rate mortgage to another plan.
Who is it best for?
A discounted rate mortgage is best suited for individuals with budget constraints in the initial years of mortgage repayment but can accommodate higher monthly installments later on.
4. Non-resident Mortgage
People residing outside the UAE can avail of this type of mortgage. However, it is important to note that banks offering this type of mortgage only finance up to 50% of the value of the property.
What’s more, the repayment period is shorter, leading to higher monthly installments.
Pros of Non-resident Mortgage in Dubai
- Foreign investors can expand their portfolio by participating in the rapidly growing Dubai real estate market.
Cons of Non-resident Mortgage in Dubai
- Higher monthly repayments because of shorter loan term.
- For non-residents of the UAE, banks typically provide financing for up to 50% of the property’s value.
Who is it best for?
This type of mortgage is great for non-residents of the UAE seeking to invest in Dubai and the UAE real estate market.
5. Fixed Rate Mortgage
It is a form of mortgage featuring a pre-determined interest rate that remains consistent for the duration of the repayment period. Furthermore, the mortgage lender determines the interest rate on the principal before the repayment period begins.
Moreover, this mortgage type typically lasts less than five years. Nonetheless, the fixed-rate mortgage undergoes a transition to a higher rate once the fixed period concludes. This reversion rate surpasses the Emirates Interbank Offered Rate (EIBOR), and the process persists until the mortgage is fully repaid.
Pros of Fixed Rate Mortgage in Dubai
- Protects against increased interest rates.
- Facilitates more manageable budgeting for loan repayments.
Cons of Fixed Rate Mortgage in Dubai
- Upon the expiration of the fixed period, the mortgage borrower is affected by a higher reversion rate.
- There is no advantage gained from a decrease in EIBOR.
Who is it best for?
Fixed-rate mortgages are suitable for individuals seeking shorter repayment terms.
6. Offset Mortgage
An offset mortgage is associated with multiple deposit accounts. With this type of mortgage, borrowers can link their savings account to the loan repayment account, enabling them to make temporary overpayments on the loan using their savings.
Moreover, the funds in the linked account remain accessible at all times. Nevertheless, if you opt for conventional overpayments, your lender will receive the funds immediately.
Pros of Offset Mortgage in Dubai
- It is possible to settle the mortgage before the scheduled period by making increased monthly repayments.
- Aids in saving money by reducing the overall interest paid on the mortgage.
Cons of Offset Mortgage in Dubai
- The interest rate for an offset mortgage surpasses that of a conventional mortgage.
- There is an annual fee associated with this type of mortgage in Dubai.
Who is it best for?
An offset mortgage is beneficial for individuals aiming to settle their mortgage ahead of schedule.
You can also read our detailed guide on how to buy property in Dubai.
Types of Mortgage in Dubai (Mortgages Based On Property Type)
Types of mortgages in Dubai can also be classified according to the type of property. Here’s a list of mortgages based on the types of property.
Commercial Mortgage
One of the mortgage options available in Dubai is a commercial mortgage, commonly chosen by business owners for acquiring real estate as a corporate asset.
Nonetheless, it’s imperative to know that the purchased property can’t be used as the primary residential unit.
Also, once the mortgage is fully repaid, you will automatically get the property’s ownership. Plus, the interest for a commercial mortgage is lower as compared to a business loan. Moreover, purchased assets act as collateral.
In the initial stages, the borrower may have to pay higher installments. Therefore, it’s crucial to assess whether withdrawing funds from the business will have any adverse effects.
Land and Construction Mortgage
This mortgage type is used for
- Renovating an existing structure
- Initiating a new construction project, or
- Acquiring land for the purpose of construction
With a construction mortgage, the entire amount is divided into segments that the borrower receives upon reaching specific project milestones.
Nevertheless, the process of repaying a construction mortgage takes time, and there may be a need to remortgage into a loan with an extended repayment period.
However, the land and construction mortgage does not cover the design phase of the building contract. The borrower has to pay these expenses on their own.
Residential Mortgage
People take residential mortgages to purchase a property as their primary residence. However, certain restrictions come with residential mortgages:
- You cannot rent out the place
- It cannot be used for business purposes
Also, residential mortgages offer the choice between a fixed and variable interest rate.
You can obtain complete ownership upon full repayment of the mortgage. What’s more, the repayment is structured over a specified time (up to 25 years). The best part is that the residential mortgages in Dubai can be remortgaged if needed.
FAQs
Q: Is It Difficult to Obtain a Mortgage in Dubai?
A: No, securing a mortgage in Dubai is relatively straightforward, provided you submit the required documentation and maintain a good credit score.
Q: Which Banks in Dubai offer Mortgages?
A: Following is the list of the banks that offer mortgages in Dubai:
The Takeaway
With that, we wrap up our guide on various types of mortgages in Dubai. Hence, understanding these options equips you to make informed decisions.
Moreover, securing a mortgage pre-approval in Dubai can simplify your property purchases, bringing you closer to buying your dream home.
Also, it’s recommended to consult with a licensed mortgage broker who can help identify the most suitable mortgage that best fits the bill.