Study before signing mortgage papers

Homebuyers must weigh their repayment capability and should not overstretch the borrowing amount. (EB FILE)

Don't give in to the temptation of getting mortgage to finance your dream home, unless you've done a careful planning, self assessment and a commitment to keep on repaying the home loan amount until its maturity.

Avoid a knee-jerk reaction and know the nitty-gritty involved before you lay your hands on any mortgage product, said analysts.

Buying a home or property through mortgage not only involves a huge amount of capital, but it is also an enormous financial responsibility and a commitment to pay the loan back to the lender on schedule. And, therefore, homebuyers must weigh their repayment capability and should not overstretch the amount they are borrowing. Although it varies as per individuals, but experts say there are a few standards rules of deciding how much mortgage loan one can afford.

Know your worth

One of the most important standard rules is calculating the monthly budget.

Before applying for a mortgage, the individual must do his monthly budget where he calculates the cost of every monthly expense from car payments, insurances, credit cards, schooling fees, house rent, food, clothing and any other possible monthly dues.

Accordingly he will evaluate if the money he is left with can be invested in a mortgage plan. In this case the buyer can approach the bank on an open and transparent relationship basis, and provide an accurate picture of income and financial commitments in order for the bank's advisors to tailor-make a mortgage plan matching the buyer's requirements and needs, said Kunal Mehta, Head of Mortgages, RakBank.

Another significant factor is determining how much disposable income you're left with after paying the monthly installment, experts say.

One should always leave room for themselves in case of emergencies and not remain without any spare cash, said Vikram Krishna, Head Retail Loans, Emirates NBD. He said there are a number of things one should be aware of and consider when making a decision regarding a mortgage. Some preliminary homework one should do is work out how much they can afford to put as a down payment, and what is the mortgage amount they should take out while ensuring the repayments are comfortable based on commitments.

He said an individual should also be aware of the pricing on the mortgage, as most of the mortgage products currently available in the market are floating rate. One should also inquire about other fees and charges, which may be applicable, including processing fees and early repayment charges.

The lender is interested in your disposable income (that means how much you have left each month after existing commitments) rather than what you earn as a salary. The size of your deposit is also important, and should be 20 per cent of the purchase price at least, though many lenders demand 30 per cent or more.

You will need to fund expenses and costs as well as the deposit, said Steve Gregory, Managing Partner, Holborn Assets, Dubai.

The price of a monthly mortgage payment depends on many things, such as the age of the applicant, as lenders will expect the loan to be cleared by age 60. The shorter the term, the higher the monthly outgoings to service it. The monthly cost as percentage of disposable income determines the amount the banks will lend.

However if a borrower is 35 and can clear a 25-year loan before age 60, he might be able to borrow 60x monthly disposable income.

Each individual bank seems to have different regulations for borrowing, for nationals as well as expatriates.

The main factors seem to include salary and how the salary is paid, the borrower's job security (time spent in the company and in the country), their repayment capability, age, nationality, and what type of industry the borrower is in, said Matthew Green, Head of Research & Consultancy UAE, CB Richard Ellis Middle East.

Generally, banks remain conservative in their lending habits and largely risk averse in matters of sanctioning home loans in the current environment. As a result, most banks continue looking to lend on completed property, and to mitigate their risk avoid lending on off-plan property unless close to completion, he adds.

Identify your objectives

For many, buying property is a once-in-a-lifetime affair and therefore when borrowing mortgage loan in the UAE or anywhere else, one must be aware of the major risks involved, such as employment risk, project completion risk, legal risk, insurance risk, and so on. The exposure to risks is greater when the buyer is buying a property just for speculative purposes. In other words, buying property just for speculative purposes could ultimately lead to losses.

Applying for a mortgage loan in the UAE or in any other place in the world always means long term financial commitment. Before getting to the mortgage stage, it is important to think about the reason for buying property. Buying solely for short-term speculation (that is to resell the property shortly afterwards and make a quick return) exposes investors to the risk of short-term market fluctuations in price and demand. It is far wiser to keep property over the long run, to move into, rent out for an extra source of income, or ultimately sell, as short-term price fluctuations even out in the long run and have limited impact on property value, said Mehta of RakBank.

Having a clear understanding between eligibility and affordability is another key point one should never miss out. In the UAE, there are key facts anyone should know before entering into a mortgage. The main one I always stress to my clients is affordability. Just because you are eligible for a certain loan does not always make it affordable to the individual, said Kim Warren, Mortgage advisor at John Charcol Middle East.

Vet available options

Another point to look at is the different mortgage offers available in the market and then pick one that suits the buyer best.

It would be helpful to compare the Annualised Percentage Rate (the loan rate plus fees and charges annualised over the transaction tenor), which may require financial advice from a professional. Also, customers must know that certain group of employers may get comparatively better terms than others – primarily due to the relationship established between the lender and the employer based on financial strength of the employer or for other reasons, said R Lakshmanan, Chief Executive Officer, Sakana Holistic Housing Solutions, Bahrain.

The buyer should compare the loans offered by various financers before taking a decision. A home loan is a long-term commitment and it is important for an individual to be cognisant of all the details pertaining to the loan to avoid surprises at a later stage, said Krishna.

While pricing is an important element in the decision making process, it should not be the only factor that should be considered.

The borrower should also look at other factors such as the reputation of the lender, branch network/ service centres etc, that will help him in the long run and ensure a good experience with the product, he adds.

Analysts also add that a new borrower needs to know the new criteria the lenders are looking to lend to, and therefore take advice from a professional helps.

Lenders in the UAE are going through a maturing process and trying to adapt to the ever changing market in UAE so their products and policies can change on a monthly basis, this is where you need the help of a professional independent mortgage broker to make sure you get the best product and rate.

Most rates in UAE are going to be variable and the loan to value (LTV) will be 80 per cent, though there are some lenders doing 85 per cent LTV in the market, says Robert Elliott Business development manager at John Charcol Middle East, Dubai.

Mortgage facts

- What is the timescale that has been agreed to purchase the property, and does this match the timescales of the financier

- Is the purchase price realistic for the area

- Which companies are offering finance to a particular project and what type of finance do they offer

- What fees and deposits are to be paid by the purchaser from their own funds, and are these accessible at the time of agreement

- Is there a requirement for documentary evidence to be sent or verified from overseas and the timelines to achieve this in relation to the agreed transfer date stated in the buyer seller sales agreement

- Is the property being purchased direct from a developer, or is there a current owner and does this person have existing finance on the property

- Is the property under construction, and who will be managing payments for construction costs? Are these to be paid direct to the developer, or managed through the new escrow accounts

- What are the exact terms at which a customer is being offered finance

- Practices between developers, banks /finance companies and real estate agents do differ, and this should be taken into account when buying new home

Source: HSBC, UAE

 

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