Choosing a mortgage lending strategy is one of the most important things that you need to think about in advance if you are going to buy investment apartments in Dubai on credit. Your finances will depend on the decision you make for many years, so it is important to weigh the pros and cons in advance. To make it easier for you to navigate the issue, Ax Capital will tell you about the nuances of long-term and short-term mortgages in Dubai.
Two factors determining the mortgage term
Two key financial factors play an important role in long-term and short-term mortgages.
No. 1 Interest on the loan
Although it has its own definition and many detailed nuances, in essence, a mortgage is the same loan as any other, and its idea is very simple. You borrow a certain amount of money, interest is accrued on the loan every month, and every month you repay a part.
Since you are borrowing a serious amount of money with a mortgage, even the slightest change in interest rates can have a big impact – the same is true when you stretch the repayment period.
Between a 20- and a 25-year mortgage, there is a difference of 5 years of paying additional interest. Let’s have a look at the example.
- For 1,000,000 dirhams for 25 years at a rate of 4 %, 583,511 dirhams will have to be paid in the form of interest;
- For 1 000 000 dirhams for 20 years at the rate of 4% – 454 353 dirhams as the interest.
A shorter repayment period will save 129,158 dirhams in the total amount of interest paid.
Of course, this calculation is oversimplified; the interest rate has not changed over the years, and the same interest rate is set for both loans, whereas in fact, your 25-year option may differ from the 20-year one. However, it is easier to understand this way: if the term of your loan is longer, you usually pay more interest.
No. 2 Monthly payments
By distributing the loan for over several years, you reduce each monthly payment. This can be easily understood by the example of a small interest-free loan of 1000 dirhams of the UAE, returned on different terms:
- More than ten payments, each of which will cost 100 dirhams;
- More than five 200 dirham payments;
- Repayment of it in three payments of 33 dirhams.
Long-term option: 1,000,000 dirhams for 25 years at 4% will require a monthly repayment of 5,278.37 dirhams.
Short-term option: 1 000 000 dirhams for 20 years at 4% it is necessary to pay 6059.80 dirhams each month.
Thus, a long-term loan costs 781.43 dirhams per month cheaper than a faster repayment.
Note! Before applying for a mortgage, you should assess your financial capabilities. Make sure that your salary will be sufficient for regular repayment of loan obligations and meeting the needs of the family.
Features of short-term mortgage lending
There are other reasons why a short-term mortgage may be more attractive.
Age of the borrower
Most Dubai banks set an age limit for customers with mortgage encumbrances. The most common is up to 65-70 years old. By the time the client reaches this age, he must repay his loan in full.
Recently, Dubai has a condition under which customers over 45 years old cannot take out a long-term mortgage for 25 years. If you have already reached this age, you will be approved for a mortgage, but for a shorter period.
Faster repayment of debt
If your financial capabilities allow you to speed up the process of loan repayments, even with a slightly higher monthly installment, it makes sense to use a short-term strategy. The difference in monthly payments between a 15, 20, and 25-year loan will be reduced, the repayment of the debt will come earlier and you will not have to pay additional interest.
Many banks offer unique conditions for mortgage repayment at a fixed rate. Please check with your bank in advance about the availability of additional offers.
Faster release from mortgage burden
The shorter the repayment period– the sooner you will become a homeowner with 100% ownership rights. Life without a mortgage is a goal for every homeowner, why not move the date forward if there is such an opportunity?
Features of long-term mortgage lending
The short-term mortgage option is not suitable for everyone, so it is worth considering the second option. Here are a few advantages of long-term mortgages.
Favorable offers for borrowers
Since the main advantage of a short-term deal is a reduction in the total interest paid, banks that issue a long-term loan often offer impressive interest rates to offset the difference. You can learn more about current offers in advance from the bank you plan to contact.
More accessible for landlords
Choosing a loan for the long term is suitable for those who are planning to buy real estate for rent. Lower monthly contributions make it much more profitable since you will be able to rent out housing and pay off the loan from income. In Dubai, rental income can reach 7% or more, depending on the type of property and the area in which it is located.
Independence from circumstances
Some customers paying a mortgage in a short term face unforeseen financial difficulties, which makes it difficult to repay the debt at the available rate. In such cases, banks often meet halfway and allow you to extend the repayment period, thereby reducing the monthly contribution. Borrowers who are initially on a long-term mortgage are easier to calculate their payments due to their relatively small size.
Possibility of early repayment
If you have the opportunity to pay more than the stated amount, a long-term mortgage can become a short-term one. Many mortgages, especially those assigned for a long period, allow duty-free overpayments, which allows customers to shorten the mortgage term by several months when their circumstances are favorable and finances are not a problem. Discuss the loan repayment plan and the possibility of early repayment in advance with a representative of the bank.
Dubai and UAE banks provide mortgage financing to foreign clients, but the conditions may vary depending on the bank. Lenders are very prudent in terms of selecting clients, so you need to carefully take care of the correctness of the documents and the reliability of the information that you specify in them. The bank’s employees check every client, especially foreign citizens, so any distortion of information will be established.
In order not to lose money with the choice of a bank, it is better to contact a specialist who will advise on the nuances of long-term and short-term mortgages, as well as tell you which of these options best suits your capabilities.
Buying a property in Dubai
Buying an apartment in Dubai is a promising investment in your future. Your comfort and well-being, as well as the rate of return on investment, depending on the correctness of the choice of the property – if you are going to use the living space for commercial purposes. Entrust the hassle of housing selection to specialists.
Ax Capital is your assistant in the search and purchase of a real estate in Dubai. For a detailed consultation on the search for real estate, its evaluation, and viewing, as well as on the conclusion of a purchase and sale transaction, contact the manager of the company.