Look beyond the headline interest rate when choosing a mortgage

Consider factors like processing fees, insurance costs and overpayment options to assess the full value of the home loan

Extending the loan tenure can lower your monthly payments and possibly increase the loan amount you can qualify for. Chris Whiteoak / The National

In today's highly competitive mortgage market, buoyed by substantial liquidity in the banking sector, lenders are continuously striving to offer the most attractive home loan options to borrowers.

However, it’s crucial to look beyond the headline interest rate and consider factors like processing fees, insurance costs, overpayment options, and more to assess the full value of a mortgage product.

Partial/full early repayment

A big factor to consider is whether the mortgage includes penalties for early repayment. If there’s a chance you might pay off your loan ahead of schedule – perhaps because of an annual bonus or unexpected windfall – choosing a product with flexible repayment terms could be more beneficial in the long term.

If an applicant has surplus cash, then they can pay it towards the principal outstanding with the bank and save on interest.

Most banks in UAE allow up to 30 per cent partial overpayment of the mortgage every calendar year for free. If an applicant follows the same drill for three years, then the mortgage will be settled within three years.

If an applicant wants to settle the mortgage fully, then there are two options. If the mortgage is settled fully by an applicant by selling the property, then there is zero penalty to do an early settlement.

If the applicant pays off their mortgage using their savings, the first 30 per cent of the outstanding mortgage balance paid off within a calendar year will not incur any penalties.

For any amount beyond that 30 per cent, the bank will charge a fee of 1 per cent of the remaining balance or Dh10,000 ($2,722), whichever is less.

Tenure

The loan tenure impacts your monthly payments. Most banks set a cut-off age of 65 for salaried applicants, but a few extend this to 70. Extending the tenure can lower your monthly payments and possibly increase the loan amount you can qualify for.

Salary transfer loan vs non-salary transfer loan

Banks encourage applicants to apply for a salary transfer loan (STL) by offering lower interest rates and waiving processing fees.

In contrast, a non-salary transfer loan typically has an interest rate that is 0.25 per cent higher than an STL, and there is a one-time processing fee ranging from 0.25 per cent to 0.50 per cent.

Valuation contest allowance

This is an important factor when choosing a mortgage provider. Some banks do not allow applicants to contest the valuation of a property if it is undervalued.

In such cases, the applicant either must switch mortgage providers, hoping to get a better valuation, or increase the downpayment beyond the minimum required to cover the shortfall caused by the undervaluation.

Also note that the valuation cost charged by a bank typically ranges from Dh2,500 to Dh3,000 plus VAT per property.

Power of attorney transactions

Confirm with the property seller whether the payment should be made directly to them or to someone with power of attorney (POA).

Some banks do not allow payments to POA holders, so choose a lender that accommodates the specific payment requirements.

Same rate migration

If an applicant plans to move abroad but wants to keep the resident salaried rate as a non-resident, they should choose a bank that allows them to retain the same rate after relocating.

Interest rates

In the UAE, mortgage interest rates are offered as hybrid or fully variable options from day one. The hybrid option is the most popular, with a fixed rate for the first one to five years, followed by a follow-on rate, which includes a bank profit margin plus Eibor.

Current rates start as low as 3.79 per cent fixed for two years, 3.99 per cent for three years, and 3.98 per cent for five years.

Associated fees

When purchasing a property, buyers must cover additional costs like the 4 per cent Dubai Land Department fee and 2 per cent agency commission.

Some banks will finance a portion of these costs, matching the loan-to-value percentage, while others do not. Applicants should confirm this with their mortgage provider when applying.

Tailor your mortgage to your needs

With a wide range of mortgage products available, it’s essential to select one that aligns with your financial circumstances. There’s no one-size-fits-all solution and choosing the wrong product can lead to costly consequences down the line.

Parth Wadhwa is senior mortgage adviser at Espace Real Estate