Look beyond the headline interest rate when choosing a mortgage

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

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”