Many people are having just a general understanding of mortgages and payment plans. Some people even start searching for a property and only then think of what payment mode are they willing to go with. Nonetheless, I’d like to highlight the important aspects of mortgages and payment plans.
In 2020 most developers are offering payment plans for a property purchase, where buyers can pay a purchase price in installments. Usually, 2-10 years, depending on the area, developer, property, price, etc. By the way, the payment plan is not always taken enthusiastically by the buyers. As an example, there’s a brand new two-bedroom apartment for AED 1,300,000 with a payment plan of 2-5 years available directly from a developer. An average buyer will consider this price high compared to a 10 years old building where you can find a similar property for AED 1,000,000 and “save” AED 300,000.
Though a 5 years payment plan might sound attractive, it doesn’t mean the entire purchase price will be broken into monthly installments of 5 years. Usually, any payment plan starts with a down payment of at least 10%, while the following 10% will be paid within the first year, and the other 80% will be broken into quarterly or monthly installments. The ratio and payment plan breakdown can be discussed, adjusted, and negotiated with developers, and it’s not enforced by the law.
A mortgage is a loan provided to a buyer by any bank to finance the purchase. Let’s have a look at the main aspects of a mortgage:
- You must have 20% of the property price as a down payment, whilst 80% will be financed by the bank if you’re an expatriate, or you need to have 15% as a down payment and 85% will be financed by the bank if you’re a UAE national.
- You must have a regular salary coming to your bank account if you’re the employee, or a good income if you’re a business owner. 3-6 months bank statement is required along with a salary certificate if you’re an employee, or a Trade License stating your name as an owner if you own a business. A “good salary” for a bank to consider to finance you with a mortgage for an average property purchase is AED 15,000 – AED 20,000.
- A mortgage is provided for a minimum of 5 years and a maximum of 25 years. Also, your age is taken into consideration while approving your tenure.
- Mortgage can also be provided to non-residents. For that, certain verification will be required.
- An average interest rate for a mortgage during the tenure to be expected is between 4-7%. You may find a mortgage with an interest rate of 1.99%, but it will remain fixed for a one, two, or three years only.
EIBOR and Bank’s Profit
A mortgage consists of two core elements: EIBOR and profit the bank makes. Let me quickly take you through EIBOR. EIBOR is the Emirates InterBank Offered Rate. Let’s imagine you’re getting a mortgage of one million dirhams from Bank A. Bank A is going to borrow one million from Bank B to lend it to you. Bank B will lend one million to Bank A at an interest rate of 2.1%. 2.1% will be EIBOR. The margin above 2.1% will be the profit of Bank A.
EIBOR is calculated daily (except Fridays and Saturday) by the Central Bank of UAE based on a particular calculation.
So for Bank A, it makes no sense to lend money with less interest rate than 2.1%, otherwise, they simply make no profit. It worth saying that EIBOR changes almost every day.
Do you think that while buying a property with a mortgage you can save more? The answer is – it depends!
Let’s imagine you bought a property, for one million (20% was a down payment, where 80% is a mortgage). Your tenure (period of the mortgage) is 10 years approved by the bank. Your interest rate for 10 years will be fluctuating, so the average rate will be around 5%. Which is 50%. So, the amount to be paid for a property became 1,500,000, as your price increased by 50% (total interest for a complete tenure). That’s an important conclusion always to take into consideration.
Concluding it all, it’s your choice what you’d like to go with:
- Brand New Property VS Used Property;
- Payment Plan VS Bank Loan;
- Warranty from the Developer VS No Warranty;
- Flexible Payment Term VS Mortgage Tenure;
- Higher Price VS Interest Rate;
- Developer VS Bank;
- New Area VS Developed Area (Matured Area);
By Akhmed Idigov