When you are entering a real estate market in the UAE, the key element to keep in mind is financing your investment. Most new players take out a mortgage to pay for their property. There are a lot of regulations under the Mortgage Law that can be confusing. Read on to know more about the Mortgage Law if you are taking a mortgage for the first time.
Regulation for UAE Citizens
The regulations for the UAE citizens are as follows:
- The loan to value will be maximum of 80% of the property value if the property is valued at AED5 million or less.
- If the property value exceeds AED5 million, the loan to value will be maximum of 70% of the property value.
- Only one loan can be taken for a property.
- If a UAE citizen is seeking a second investment, the loan to value should not exceed 65% of the property value.
Regulation for non-UAE Nationals
The regulations for the non-UAE Nationals are as follows:
- The loan to value will be maximum of 75% of the property value if the property is valued at AED5 million or less.
- If the property value exceeds AED5 million, the loan to value will be maximum of 65% of the property value.
- Only one loan can be taken for a property.
- If a non-UAE citizen is seeking a second investment, the loan to value should not exceed 60% of the property value.
If the property is incomplete, the people in the UAE, regardless of the citizenship, can get a maximum of 50% of the property value as loan. This is regardless of the number of investments the borrower has.
The maximum mortgage term offered is 25 years. The maximum age limit allowed to repay the loan is 70 years for UAE citizen and 65 years for non-UAE Nationals. If the non-UAE Nationals are self-employed, the age limit to repay the loan is set at 70 years.
The Central Bank Law states that no more than 50% of a person’s total income should be committed to paying off debts. The debts include mortgage payments, car loan, credit cards, and other loans. It is important that you examine your financial situation before you apply for a mortgage.
Importance of debt to burden ratio
Most loan providers develop a standard debt to burden ratio to calculate the exact income of the borrower and to see how much the borrower can repay. The debt to burden ratio must not exceed 50%. The maximum amount that can be financed is 8 times the annual income for UAE Nationals and for the non-UAE Nationals, it is 7 times their annual income. The debt to burden ratio does not take into consideration the promotional interest rates being offered by the lenders.
Related Read: What is debt to burden ratio
The main foundations of the Mortgage Law are as follows:
- Mortgage: It is not valid unless it is registered with the department.
- Mortgagor: Is the owner of the property who will bear the cost of the contract unless stated otherwise.
- Mortgage fee: The cost of registering a mortgage is 0.25% of the loan amount plus AED4,100. This is mentioned in the Article 7 of the Mortgage Law.
- The Mortgage Application Procedure for RERA outlines the particulars that are to be accompanied with the mortgage application for it to be registered.
- The legal effects of a mortgage lay out the restrictions and rights of the mortgagor and the mortgagee during the period of the mortgage. This is mentioned in Articles 10 -20 of the Mortgage Law.
- The execution proceeding on the mortgaged property outlines instructions on how the mortgagee shall commence proceedings against the mortgagor if the mortgagor has defaulted in payments. This is mentioned in Articles 25 -30 of the Mortgage Law.
When it comes to payment rates, there are two types of mortgages offered in the UAE:
- Variable rate mortgage:
- Fixed rate mortgage:
Here the interest rate is based on the market factors. The interest rate can change any time during the mortgage term. This is a good option if the interest rates are stabilizing or decreasing. You can choose to take a risk if you have financial flexibility and stability to handle the change in the mortgage rates. There will be months where you will be paying very less interest, but then there will be months where you will be paying more. So, you need to have extra income coming in to meet the additional cost.
If you want this option to work out, you can choose to keep aside a fund to meet your mortgage repayment each month.
Under this option, your interest rate is fixed for the term of the mortgage. The rate is determined before you are signing the mortgage offer letter. Most lenders offer it for 1-5 years and change it after the agreed term. But, there are some lenders that offer a fixed interest rate for the entire term of the loan.
This is a good option if you need a clear budget. You will know for sure that your mortgage payments will never change. You can lock in a rate if you fear that the mortgage rate can rise in the future. You can budget your monthly expenses as you know exactly how much you will be paying each month.
Make sure that you are aware of the payment rates before you sign any documents. The Mortgage Law is very clear and easy to understand. You must be aware of the amount of loan you can get based on your income. It is helpful to have a pre-approval so that you won’t be surprised in the future. When you have a pre-approval, you will be in a better negotiating position and you will know the highest possible loan you can get from the banks. It is important to maintain your debt to burden ratio, if it is close to 50%, there is a good chance you will not get a mortgage. You must also have a good credit rating to avail the lowest interest rates.