By: Allsopp & Allsopp
We all know that a mortgage is a loan taken from the bank to pay for a property, but for most of us, this is where our knowledge of mortgages begins to diminish.
When the plans of buying your ﬁrst home edge nearer, you may ﬁnd yourself having a play around on bank’s online mortgage calculators and ﬁnding out what your initial mortgage repayments will be. Then you jump onto a property portal and see what properties are within your reach – all very exciting!
As the dream of your ability to step foot on the property ladder is starting to become a reality, the research into a mortgage truly begins. You will come across terms such as ﬁxed rate, variable rate, bank margins and EIBOR (Emirates Inter Bank Offer Rate) and you will begin to try and understand what these mean to you.
You can have meetings with different banks and listen intently as they talk you through their competitive rates and the beneﬁts you receive whilst taking a mortgage through them, or you can have an open and honest chat with an independent mortgage consultant.
These initial meetings can be rather overwhelming, and it becomes very easy to sign up to a mortgage because you have been convinced it’s the best deal without understanding what the repayments, insurances, processing fees and early settlement fees really mean and how they can affect you.
This is a common mistake that many ﬁrst-time buyers make when getting a mortgage in Dubai. An independent mortgage consultant is the best way forward when you are trying to get your head around borrowing the largest amount of money you’ve borrowed in your life!
An independent mortgage consultant who is seasoned in the market will already have preferential rates set up with a number of banks. They can tailor a quote entirely revolved around your circumstances and explain exactly what you will be paying, what the fees are and where you can save thousands of AED.
To understand the mortgage process, it is easier to see it as a chain. The bank will borrow money from the Central Bank who work using EIBOR, banks then add their own proﬁt margin which is combined with the EIBOR rate as a variable rate to charge to clients after their attractive ﬁxed rate is complete.
The most important part of the mortgage choosing process is understanding what the rate will be when your ﬁxed rate changes to a variable rate. Many banks will entice clients with a very attractive ﬁxed rate over 3 years for example, but when they add their own proﬁt margin to the EIBOR, the variable rate can often become a lot higher than the previous ﬁxed rate.
You will be paying a variable rate for the majority of your mortgage which, in many people’s opinion makes the bank margin the most important rate to look at before signing a mortgage contract.
Look at the comparison below for a 20-year mortgage borrowing 75% of an AED 2,500,000 property as an example:
BY LOOKING PAST THE LOW FIXED RATE AND PROCESSING FEE IN BANK 2 AND BY CHOOSING BANK 1 WITH THE LOWER VARIABLE RATE YOU WILL SAVE A TOTAL OF AED 68,345
On top of the follow-on bank margin, you must also be aware of the processing fees which can be anywhere from 0.5% to 1% of the mortgage value.