Understanding the Laws of Banking before Taking a Home Loan

So you have zeroed in on a property and plan on taking a mortgage loan. Of course, financing your property investment can be as easy as going to the bank with the necessary documents and getting them approved. But many regulations can be a little confusing at first. The following is a list of the provisions that come under Dubai’s Mortgage Law.

Examining Your Finances

As per UAE Central bank laws, no more than 50% of your total income should be utilized in paying debts. This includes mortgage payments, credit cards and other loans. This is why before you get into a property purchase plan, examine your financial situation. You can also seek the advice of financial planners that can assess and offer you an insight into your finances.

Property Valuation

Once you decide upon the property and go into signing a contract with the seller, it is important to ensure that the transaction comprises the property valuation by the bank. This is an important stage since you will be putting a signing amount, generally 25% of the purchase price during the contract. Also, ensure you get financial approval from the bank before you commit to the agreement.

Mortgage Law

Any mortgage availed by an individual in Dubai is not valid unless it is registered with the Land Department. As the applicant, you will have to bear the additional cost of the contract along with the registration fee of around 0.25%. For properties that are under construction, you will need to submit additional particulars for registration under the Mortgage Application Procedure for RERA.

Loan-to-Value Ratios

LTV or loan-to-value ratio is standardized across all the banks in the UAE. Properties that cost higher will have a lower LTV ratio as compared to moderate or cheaper properties. In comparison to higher value assets, the smaller loan amounts are easily made available by the banks. Another aspect to consider is, LTV only covers 75% of the property value and can even be lesser in case it is a subsequent property or an off-plan investment.

Interest Rates

Banks that provide mortgage offer the loan with two types of payment rates. The interest can be either Fixes Rate that is determined before the signing of the mortgage offer. This fixed rate can be for a period of one to five years, or in some cases can even cover the entire term of the loan. Variable interest rate mortgages are the ones where the interest is dependent on the market factor and can change on fixed margin plus the Prime rate which is usually EIBOR or bank’s internal lending rate. The rate is subjected to change at any duration of the loan term.

Consider that both these methods have their pros and cons when it comes to repayment. The fixed-rate can help you set a clear budget for you since you know how much you will pay each month. On the other hand, a variable interest has a chance to stabilize or decrease as per the market. It is suggested to avail a variable interest rate mortgage only if you have the financial flexibility to handle the fluctuating rates.

Summary

As per the Central Bank laws, only 50% of your income can be utilized for paying debts

Get a mortgage approval from your bank before signing a contract with the seller

Find out the bank’s property valuation in before you agree upon a price with the seller

Check additional costs incurred such as registration fees with the department

Loan-to-value ratio of banks differ as per the type of property and its market price

Among fixed and variable rates, choose an interest rate that matches your requirements

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