PMI Helps cash constraint buyers!

PMI stands for Private Mortgage Insurance, which is required to secure if you want to buy a property on loan but don’t have 20% or less cash to put down as down payment. The basic purpose why banks in Dubai often ask for such insurance is that they don’t want to face the increasing defaults, which they had faced in the past. PMI provides protection to the lenders against defaults, since it indemnifies them in case borrowers don’t pay their monthly payments. It also helps cash constraint buyers to buy a property and enjoy rental in Dubai with less money in hand.

Why you should Avoid PMI in Dubai?

Though PMI is a great way to buy properties and then offering them for rent in Dubai, yet there are also some problems attached to it. These problems require an astute investor to avoid this insurance to the best of their efforts while purchasing a property for earning Dubai rent.

High Costs! - PMI costs normally 0.5% to 1% of the property loan annually, which is quite a hefty sum. You are going to purchase a property in Dubai due to low prices, and if you would add to its cost annually, the concept of buying low and offering for high rent completely dies. If you divide the annual insurance amount to have a figure of monthly payment, you would come to know it is as high as paying a car finance payment.

Not easy to end! – Normally PMI ends when the equity of the buyer in the property reaches 20% but this is not always the case. Many banks in Dubai also require you to pay continue paying for the PMI until you have paid 50% or even 100% of the loan. This situation mostly arises when the buyer constantly delays his mortgage payments. Since, it is not easy to end; it is a constant cost burden on the borrowers.

Difficult to cancel! -  Buyers of Dubai property can also cancel the PMI anytime if the property rises in value. But it is also difficult, since the lenders ask the borrowers to produce a letter requesting the cancellation. Moreover, they check the proofs of the property appreciation through detailed valuation surveys which are conducted on the cost of the borrowers. The procedure is lengthy and can even take several months.

Don’t get fascinated by PMI and try to avoid it at any cost. Remember! It’s always better to secure a normal mortgage in Dubai by putting down your own savings as down payment.

Islamic mortgages in Dubai

For the Muslims, several Islamic Dubai banks have opened up their doors to provide Islamic mortgages which are surely different from conventional mortgages. Islamic mortgages are basically the part of the several Islamic financing products offered by various banks in Dubai including Almak, Tamweel, Badr- Al- Islami and Mawarid. These mortgages allow the Muslims to secure finance for buying a Dubai property according to the Shariah Compliant law in which riba or interest is strictly prohibited.

The top two Islamic mortgages which are very commonly available in Dubai or the UAE include the following.

Murabaha Mortgages in Dubai – In order to secure this type of Islamic mortgage, you must have a fair amount of capital in hand to pay as a percentage of the value of the property as down payment. The amount of the monthly installments and the time of the loan maturity are decided between the banker and the borrower and they remained fixed until the retirement of complete debt. The banks allow 15 years of repayment maximum and if the borrowers at any time want to pay the entire loan before the end of the deal, they can do so with out payment of any penalty.

Ijara Mortgages in Dubai – This is the most famous mode of Islamic home financing in Dubai, since this scheme does not allow the borrower to pay any deposit as a down payment to secure the deal.  In this, the bank acts like a landlord which provides a property for rent in Dubai. Along with the rents, the borrower is also supposed to make the yearly fixed monthly mortgage payments. Once the purchase price of the property is paid and the loan term comes to an end, the borrower becomes the registered owner of the property in Dubai.

However, the terms and conditions of the Islamic mortgages vary from the bank to the bank in Dubai. But for any Muslim, securing the Islamic mortgage now in Dubai with much relaxed terms and conditions has become more favorable than ever.

According to a report, Tamweel is now firmly back in the mortgage business and it is expected that it would play a key role in the recovery of Dubai real estate market. The increased income of the Tamweel during 2011 has led experts to think of better mortgage demand ahead, since low mortgage rates are greatly tempting buyers to invest in Dubai real estate.

Despite the better mortgage rates, some buyers in Dubai are still facing problems in getting a good mortgage rate. This is because mortgage lenders have introduced several mortgage products to facilitate those buyers, who wish to invest in Dubai rental or buying market for better yields in future. These several options are greatly confusing buyers. If buyers follow the simple steps, they can surely get a good mortgage deal in Dubai.

Access your financial position

Before accessing the bank for a mortgage deal, make sure you know your exact financial position. Make a monthly budget of your income and expenditures and figure out the amount of the instalment you can easily pay monthly to secure a good mortgage deal for you. Besides the monthly payments, estimate your savings to know if they are enough to meet the fees and down payments of the deal or not

Work on your credit score first

Since the major reason of the death of Dubai real estate was the high default rate, so the banks in Dubai no longer compromise on bad credit scores. Even the banks who lend poor credit mortgages offer higher interest rates on such loans. If you credit score is bad and you want to secure a better mortgage rate, improve it first. Pay off some of your loans or credit cards bills and make some of your accounts current to improve your overall score.

Contact the selected banker

After accessing your financial position and improving your credit score, interview some mortgage lenders and select the one that has multiple mortgage products according to your current financial situation. Negotiate your specifications to the lender and ask him to provide you the list of various mortgage options matching your requirements. Mortgage lenders are experts and they can always suggest you deals that may suit you the best.

Make cost v/s benefit analysis

Before selecting any deal, be careful about the rate of interest because a lower rate of interest is not always a better rate of interest. Calculate the complete cost of the deal including down payment, size of instalments, duration to repay the loans, and the fees to transfer the property in your name. After calculation of the cost, compare this cost with the benefit you are going to take against your cash. If you find the deal worthy of investing in, go for it, since it is surely a better rate or a better deal for you.

Though banks have slashed their mortgage rates, yet the mortgage rates are still very high and paying off their monthly instalments is still out of the budget of the buyers. These high mortgage rates are hampering even those buyers who are willing but unable to invest due to affordability issues. In UAE, mostly banks require you to have an income of Dh 20,000 to be eligible for housing finance where as 45% of the households have even less than Dh15,000 in UAE. It means 45% of the households are not even eligible to apply for the housing loans.

After financial crises of 2008, banks were reluctant to lend at flexible rates and were charging 8-10% of the loan due to the higher risk of defaults. These rates have been made much flexible and easy for the buyers to pay during the last two years. Especially during 2011, banks competed on interest rates and offered as low as 4-5% to lure buyers towards their products. Many banks offered freebies and some even introduced multiple new mortgage products to attract buyers. Many banks are still providing house finances for buying and Dubai rental properties at a rate ranging between 5-8% of the loan still affordability remains the main issue.

Despite better relaxing terms and conditions, buyers are not able to purchase perfect housing loans for themselves due to their low purchasing power and higher interest rates. Banks know that they can play with the mortgage rates to fix the deteriorating condition of Dubai real estate but they also do not want to repeat the mistake they made in the past, which increased the portfolio of their non-performing loans. Many developers are requesting banks to make the lending criteria flexible for them but banks still finance only for the completed properties and with in the range of 70-80% of the value of the house to minimize their risk.

Remortgaging means kissing off good bye to the current mortgage deal and availing another one, of the same or the different lender. Some people think it is the practice of moving mortgage loan to some other lender. This is wrong because if your current lender is offering you a better deal, switching to that deal would also be remortgaging. This is very beneficial for the buyer especially if the early repayment fee of his current loan is less.

Remortgaging in Dubai

Dubai real estate is passing through a tough time. During the last two years, not even a single bank was ready to issue mortgage loans at lower rates of interest. This is because when Dubai real estate market collapsed, loan buyers made huge defaults, which increased the banks portfolio of non-performing loans. High interest rates of above 9% along with the strict procedures were hampering buyers to invest in Dubai properties. With now property prices recovering in all the areas of Dubai, banks are ready to lend at mortgage rates at lower than 5%.

In order to lure buyers to invest in Dubai real estate, banks have also introduced multiple mortgage products that are flexible and offer many favours to the buyers. Those buyers who financed properties at higher rates of interest are now considering remortgaging. This is because if they shift their mortgage, they can save much money.

Reasons for Remortgaging

Mortgage buyers normally go for remortgaging due to the following six reasons. If you having any one of the reason to switch to a new mortgage, this is the right time to practice it in Dubai.

1. If you are currently paying a variable rate on mortgage and you expect rise in interest rate in the near future again. Its better to remortgage with a fixed rate of interest.
2. If the existing bank has introduced more flexible mortgage deals in terms of over payment, underpayment, and early repayment fees, switching to other deals would be a wise idea.
3. If you feel home improvements can add value to the Dubai property in the current situation, consider using remortgage to release the equity and reinvest in another mortgage into the same property.
4. If repayment of the current loan and switching to another will decrease your monthly loan instalments, you should definitely go for remortgaging.
5. If your financial status has improved and previously due to bad credit profile you have been charged at a higher rate of interest, then you should remortgage to be charged at lower interest rate.

If your current mortgage is costing you much, this is the right time to think of remortgaging in Dubai.

With the earliest signs of stabilization seen in 2010 and later on growth being recorded in first, 2^nd and 3^rd quarter of 2011, banks confidence on mortgage lending has increased. This is because they feel Dubai real estate market is a long-term market and investors from all the gulf and non-gulf regions are interested to buy Dubai properties here right now at low prices with an expectation of price appreciation in near future. Some investors want o invest in Dubai property right now but they still can’t afford them. To facilitate such buyers all the banks in Dubai are offering affordable mortgage products at low rates.

Finally, after 2008, it is the time of celebration because Dubai mortgage market is springing back to life. Tamweel has also re-entered the market with more flexible and cheap mortgage products. Mortgage rates of banks have been reduced drastically and in the first quarter of 2011, mortgage loans were offered at a rate of 5.8 to 6%. New mortgage products have been introduced that favour buyers and two most important products in this regard are:

1. Fixed Mortgage products: These products are offered on fixed interest rates and this rate is predetermined that does not fluctuate with the market rate.
2. Free-Free products: These products allow buyers to shift their mortgage to other lenders at a very low cost.

Finally, it is the time to cheer about Dubai mortgage market because it is now back to life. Due to the flexible lending criteria of banks, experts are expecting better times ahead for Dubai rental as well as overall Dubai real estate market ahead.

Follow some simple steps to secure a perfect mortgage in Dubai.

Step 1: Hire a mortgage broker and ask him to assess all the mortgage options that can be available for you. Decide your budget first and let your broker then offer you multiple options. A good broker knows better terms and conditions and carries out necessary paperwork to close the deal smoothly.

Step 2: Decide which loan do you want (fixed or floating mortgage loan), the repayment period, and the terms of flexibility to move between the lenders. If you intend to pay the mortgage early, choose the loan that allows you to repay early at no extra cost. Moreover, choose the loan according to the deposit amount you have in hand. Mostly in Dubai, if you have deposit amount of 25% or above, all options of mortgage loans are almost open to you.

Step 3: To avoid the problems with the finance approval later on, get your approval in place before hand. Some banks in Dubai have no salary limit for the grant of loan while others require a salary of at least Dh 10,000 to Dh 15000. You are  required a salary letter, personal bank statements, credit card statements, proof of address, passport copy and visa page copy to get the approval which is valid for 90 days.

Step 4: The bank then conducts background check on you verifies the information provided by you. If you have ever committed default and your cheques were bounced, the bank will take it serious and the grant of the loan will totally be at its own discretion. The bank will check your credit rating and ability to pay and will then qualify you for a loan.

Step 5: The next step is to understand the fee structure of the bank. In addition to the deposit, you have to pay a fee of almost 4 to 5%, which includes arrangement fees, valuation fees, processing fees, transfer fees, mortgage registration fees, document fees and fees paid to the broker.

Step 6: Get a life insurance because life insurance is compulsory for the sanction of mortgage loan of Dubai property. Mostly Dubai banks require you to have the insurance provider of their choice but three or four banks are also there that allow you to sign your insurance own policy.

Step 7: The last step is to sign the contract or memorandum of understanding ( MoU) which defines the rights and liabilities arising out of the contract for both the parties. This agreement establishes parameters like fees involved, time of sale, date of transfer, agreed price, deposit, and balance of payments.

Congratulations! You have secured a perfect mortgage loan for yourself.

This was due to the fact that their portfolio of non performing loans was getting very high. Mortgage defaulters were increasing in number and even the owners of the ready properties were reluctant to take their ownership. This decreased confidence of the people on Dubai real estate sector was a great hindrance in fixing the situation of mortgages in Dubai and the UAE.

With the earliest signs of stabilization seen in 2010, calm smile stretched on the faces of Dubai real estate stakeholders. Mortgages issued by the banks hit a figure of Dh 163.19 billion in 2010, which is almost up by 15 % as compared to the figure recorded in 2009. This showed that banks had started to use mortgages to bring recovery in real estate sector.

Banks have continued to play with the mortgage rates in 2011. Recently central bank of Dubai has slashed EIBOR which has reduced the mortgage rates of every single bank operating in Dubai and the UAE. The mortgage rates along with the property prices touching the bottom level are tempting buyers to invest in real estate.

At this moment of time, Dubai banks have large liquidity and they are in a better position to squeeze mortgage rates to uplift the demand of Dubai properties. Mortgage rates are now 8 to 9 % down from the crises period and these are tempting buyers to purchase their dream home in limited incomes.

Many new lenders are entering into the battle field to facilitate mortgage buyers and currently 28 lenders are there in the market, which are tempting buyers by their mortgage loans as low as 4.99%.

Standard Chartered Bank has announced lowest mortgage rate of 4.99% matching the mortgage rate offered by United Arab bank. For 25 years mortgages, the HSBC is lending at 5.49% and Barclays’ at 5.99%. Besides that, many other banks which were previously financing up to 70 to 75% of the value of the home are now financing up to 85% of the value of the home.

These low mortgage rates are attracting buyers and they have begun investing in Dubai rental and buying properties. This increase in demand is expected to overcome the problem of oversupply of properties and many experts are hopeful that better time is coming ahead.

Recently Central bank has slashed EIBOR by 31% or 66 base points. As a result all the international and local banks operating in Dubai has also reduced their interest rates. This is a smart move to attract buyers towards Dubai real estate. The buyers mostly remain confused which mortgage loan is more beneficial for them. Mostly Dubai banks offer two types of loans for Dubai properties:

Standard Variable Rate Loan: This is the most popular mortgage loan in the entire UAE and Dubai. This rate is not fixed and is independent of various market forces. Mostly, this rate variates with the overall interest rate. Also, the features of this type of loan vary from buyer to buyer. This rate benefits buyers when interest rates are decreasing constantly in the market.

Fixed Rate Loan: This mortgage rate is set for a definite period of time and remains fixed for it irrespective of the change in other market forces. Buyer gets to know in advance his monthly liabilities and can arrange for them in advance. This interest rate benefits the buyers when interest rates are constantly rising in the market.

Which is better right NOW?

As mentioned earlier, currently banks have lowered interest rates so the best rate that is more beneficial for the buyers right now can be “Standard variable Rate Loan”. This is because Government and banks want recovery on immediate basis and they have started playing with the interest rates. Now banks are also in a better position to slash interest rates because they feel on the safer side due to stabilization seen in Dubai rental and property prices across many regions.  According to a mere prediction, interest rates will continue to shrink in the coming months. Standard Variable rate changes with the overall interest rates in market so if buyers take mortgage loan on this rate, it will cost them less.

Property prices has declined to a level where every one wants to invest in Dubai properties but still the lending procedure is complicated, tedious and time consuming. Even experts say the expensiveness of mortgage loans, heavy down payments and lengthy financing procedures are discouraging buyers to take finance and invest in real estate sector.

Moreover, there is also another problem with Dubai mortgages. There are many deals which are collapsing due to the requirement of increased equity contribution on the part of buyers. The buyers come, identify the property they are interested to buy and tell negotiate their terms and conditions to the bankers. But after the sanction of loan and prior to completion of final transaction buyers come to know that approved property value does not cost equal to approved property value. In this case only few raise their equity contribution while many end up the deal.

Also, 20 to 30 % increase in the cash deposit is also stopping buyers to buy properties in Dubai for self living or Dubai rental purposes. But if we neglect its darker part, we will come to know this increase is also proving beneficial because it leaves mortgage companies with good amount if the buyer breaches the contract. Recently the Almak Finance, Dubai based Islamic finance company ahs taken legal action against some investors who refused bluntly to take their properties’ possession. This step taken by Almak is a kind of warning for the mortgage defaulters.

So I would end this blog by saying that, though lending criteria is not being relaxed further by the central bank of Dubai, it is good from some aspects yet Dubai real estate is in distressed condition and we should do everything to bring recovery in it. Relaxing lending criteria is something that can do it in less time!