I always recommend that buyers get a mortgage for their property, even if they can afford to pay it in cash, whether it is a home or an investment. I won’t go into the reasons for that in this article, but with mortgage rates around four percent, you can invest that extra capital in other assets, to both diversify your investments and search for higher returns.
So, if you are getting a mortgage what traps do you need to avoid, and how?
1. Not checking your financial profile in advance
There are several limits to what you can borrow. The first of these is you can only borrow up to seven years your annual salary. For example, someone getting AED 20,000 per month can only borrow AED 1.68 million. The second important factor is your total loan repayments (on all borrowings) cannot be more than 50 percent of your income. So, on AED 20,000 per month, the repayments must be below AED 10,000. This includes car and personal loans, five percent of credit card balances and any other financial instruments you have. Make sure you understand this and pay off anything you need, to make sure you’re over this threshold, or you’ll be denied.
2. Not checking your credit score
A poor credit score can mean you’ll be rejected, even if you pass all of the other relevant hurdles. You can check your score in the UAE at the Etihad Credit Bureau.
3. Not having enough deposit
Understand the amount of deposit you need for your loan. Current mandated loan to value ratios are 20 percent for a first time property under AED five million, 30 percent for a first time property over AED five million, and 40 percent for a second property (these are five percent less for UAE nationals). You will also need to budget about five percent for broker fees, transfer fees and other costs.
4. Not shopping around for the best deal
Don’t just go to your own bank for a mortgage, make sure you know what others in the market are offering. It might be worth your while going through an independent mortgage advisor who can assess your situation and offer you the best options.
Also, remember that the right one for you might not be the lowest rate, the fixed term might be important as well as understanding any hidden fees. Fees can be applied when taking the mortgage and even on exit, so understand these well.
5. Not being on top of your lender/mortgage advisor during the process
We have seen many situations of a buyer being in default under the Memorandum of Understanding because they have faced delays with their bank. Banks are not on the same timeline as you are – people go on vacation, resign, or even just take their own sweet time. Be on top of them or your mortgage advisor from day one.
6. Starting too late
Get your “pre-approval” or “approval in principle” before you sign the Memorandum of Understanding on a property. If you have any issues, they should come to light during this process, such as if there is an issue with your employer (self-employed), or your income or your debts. Make sure you have this conversation before committing to the purchase.
In summary, talk to someone early. As soon as you start thinking about buying, even before you set a budget and start viewings, have that early conversation. Understand your position with a potential bank to make sure when you start on the journey, it will be smooth.
Also read Ben Crompton’s previous column on: The hidden costs of owing property in Abu Dhabi
The Real Estate Experience is an exclusive fortnightly column written for The Gulf Pulse by Ben Crompton. Ben is the Managing Partner of Crompton Partners, Abu Dhabi and an expert in the investment and legal side of property in the Emirate. A Cambridge law graduate and avid rugby supporter, Ben brings sharp insights and practical advice to the readers.
