A mortgage guide for first-time buyers in Dubai

Since purchasing a property is one of the biggest life decisions most people will ever make, we’ve put together a handy guide to the process in the emirate.

Taking the plunge in Dubai’s buzzing real estate market as a first-time buyer is exciting, but if you’re going the mortgage route it requires getting to grips with the intricacies that may be quite different from other cities.

That doesn’t mean getting a mortgage in Dubai is ‘hard’ – in fact it’s becoming increasingly popular.

A recent survey by mortgage consultancy Mortgage Finder shows that mortgage buyers accounted for 43% of all ready sales transactions in the second quarter of 2024, up from 35% during the same period in 2023.

Thomas Poulson, Sales Director at haus & haus recently told media outlet AGBI that he puts this down to interest rate cuts making monthly payments more manageable and competitive lending rates compared to other major cities globally – as well as a shift in market dynamics, stating that cash buyers no longer hold as strong a negotiating position as they once did.

"There are fewer distressed sellers, meaning sellers are often prepared to wait for a higher price," he explained.

What exactly is a mortgage anyway?

A mortgage – also known as a home loan – is a financial agreement where a lender provides funds to a borrower to purchase a property. The borrower agrees to repay the loan over a specified period, with interest. Home loans are secured, meaning the property itself serves as collateral. In the event of non-payment, the lender has the right to seize the property to recover the loan amount.

Types of loan options for first-time buyers

When it comes to mortgage options first-time buyers have several choices, but there are distinctions in terms of eligibility, terms, and conditions.

1. Conventional home loans - Are the most common type of mortgage. These loans are typically offered at fixed or variable interest rates and require a down payment, usually around 20% of the property's value if you only have one mortgage. If it is your second mortgage (regardless of being a first-time buyer) then the downpayment is 40%. If the loan is over AED 5,000,000 then it's a 30% down payment. It is also worth noting that most banks will finance Dubai Land Department (DLD) and broker fees too (the additional 6%) and its relative to the loan amount (they will finance 60-80% of fees depending).
    
2. Islamic home loans (Murabaha and Ijara) - Are structured to comply with Sharia law, which prohibits charging interest. Instead, these loans operate on profit-sharing or lease-to-own principles.

• Murabaha: The bank buys the property and sells it to the buyer at a profit. The buyer repays the bank in fixed installments.
• Ijara: The bank buys the property and leases it to the buyer. The buyer makes rental payments until they own the property. 

Fixed-Rate vs. Variable-Rate mortgages

You’ve probably heard the terms ‘Fixed-Rate’ versus ‘Variable-Rate’ when it comes to mortgages. But what’s the difference?

With a fixed-rate mortgage the interest rate remains constant throughout the loan term, providing predictability in monthly payments. This is beneficial for first-time buyers who prefer stable and predictable financial planning. Fixed rates can vary depending on the bank and the term of the loan, but in Dubai generally ranges from 3% to 5%.

As for variable-rate mortgages – these are typically based on the 3-month Emirates Interbank Offered Rate (EIBOR) plus a fixed margin. For example, HSBC offers a variable rate home loan with a fixed margin of around 1.19% plus the 3-month EIBOR, which is currently about 4.99%, making the total rate approximately 6.18%.

What does LTV mean?

In the process you’ll also likely hear the phrase Loan-to-Value (LTV), which is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. It is commonly used in mortgage lending to determine the risk of lending a certain amount of money for a property.

LTV is calculated by dividing the loan amount by the appraised value of the property. For example, if you want to buy a property worth AED 1,000,000 and you need a loan of AED 800,000, the LTV ratio would be 80%.

Eligibility criteria and the paperwork for getting a Dubai mortgage

For first-time Dubai buyers need:

• Proof of employment: Steady employment with a reputable company.
• Income proof: Bank statements and salary certificates.
• Credit history: Good credit score demonstrating financial responsibility.
• Down Payment: Around 20% of the property value.

What are the top tips for getting a mortgage?

Research and compare: Different lenders offer varying terms, interest rates, and eligibility criteria. Research thoroughly and compare multiple options to find the best fit for your needs.

Get pre-approval: Securing a mortgage pre-approval gives you a clear idea of your budget and strengthens your position when negotiating with sellers.

Consult a mortgage advisor: Professional advisors can help navigate the complexities of the mortgage market, providing valuable insights and assistance in finding suitable loan options.

Understand those additional costs: Factor in additional expenses such as property valuation fees, mortgage registration fees, and insurance costs.

Maintain good credit: Finally – but crucially – a strong credit history enhances your eligibility for better mortgage terms and lower interest rates.

Want professional mortgage advice? Speak to our team