Managing mortgages: How can you prep your finances for a mortgage?

It’s definitely a great time to buy property in Dubai’s dynamic real estate market and with the city being one of the most affordable with the highest capital appreciation rates globally - there really isn’t a better time.

However, it's essential to prepare your finances thoroughly to ensure a smooth and successful mortgage application process.

What is Dubai's mortgage landscape like?

Before diving into your finances, it's crucial to understand the mortgage landscape in Dubai.

The UAE Central Bank regulates mortgage lending, and several local and international banks offer mortgage products. Mortgage terms, interest rates, and eligibility criteria can vary, so it's essential to research and compare different options in Dubai.

Different types of mortgages

1. Fixed-rate mortgages: The interest rate in these types of mortgages remains constant throughout the loan term, providing predictability in monthly payments and ease. This is highly recommended for people with fixed incomes who need a monthly fixed payment.

2. Variable-rate mortgages: The interest rate can fluctuate based on market conditions, which might lead to varying monthly payments, this is more set for those who can comfortably afford a mortgage.

3. Offset mortgages: These link your savings account to your mortgage, reducing the interest you pay on the loan. Often chosen by buyers for off-plan properties and large-scale properties.

What is the eligibility criteria?

To qualify for a mortgage in Dubai, you generally need to meet the following criteria:

• Minimum age of 21 years
• Minimum monthly income (varies by the chosen bank and your occupation)
• Good credit history
• Employment history and stability

How to prepare your finances

Step 1: Assess your finances in advance

The first step in preparing your finances for a mortgage is to assess your current financial situation.

This involves evaluating your monthly income, expenses, savings, and debt levels. Based on this you can give yourself an idea of how much you can afford with a mortgage - what helps is also looking through a mortgage calculator.

Step 2: Calculate your debt-to-income ratio

Your debt-to-income (DTI) ratio is a critical factor that lenders consider before giving/approving your mortgage.

A debt-to-income ratio measures your monthly debt payments against your gross monthly income. A lower DTI ratio indicates better financial health and a higher likelihood of mortgage approval.

Fun fact: Lenders in Dubai typically prefer a DTI ratio of 50% or lower.

Step 3: Review your credit report

A good credit history is crucial for securing a mortgage - of course!

So you need to obtain your credit report from Al Etihad Credit Bureau and review it for any discrepancies or unpaid debts. A higher credit score increases your chances of mortgage approval and favourable interest rates.

This report helps with a pre-approval so it's best to have it at hand sooner than later.

Step 4: Start saving for your down payment

For any mortgage sale, a minimum down payment is mandatory so it's always good to save ahead for that. In Dubai, the minimum down payment requirement varies based on your residency status and the property's value. As a guideline, you should follow:

• For expatriates, a minimum of 20% down payment is required for properties valued under AED 5 million.
• For UAE nationals, the minimum down payment is 15% for properties valued under AED 5 million.

For properties valued above AED 5 million, the down payment requirement increases to 30% for expatriates and 25% for UAE nationals.

Step 5: Work on those debts (if any)

It's always good to stay ahead of the game and reduce any existing debts as it can improve your DTI ratio and increase your chances of mortgage approval.

You want to focus on paying off high-interest debts, such as credit card balances and personal loans, before applying for a mortgage as this looks much better to banks.

Here are some tips to reduce your debt quickly:

1. Debt snowball method: Pay off smaller debts first, then use the freed-up funds to tackle larger debts.

2. Debt avalanche method: Prioritise debts with the highest interest rates to minimise overall interest payments.

Step 6: Have a more stabilised income record

Lenders prefer applicants with stable employment and a steady income.

Aim to maintain an income stream via employment with your current employer for at least six months before applying for a mortgage. If you're self-employed, ensure you have a consistent income history for the past two to three years as you will be asked for your bank statements.

Step 7: Build a budget

When buying property in Dubai, there are additional costs beyond the down payment and monthly mortgage payments, and it helps to save a lot of time for these costs. These may include:

• Property registration fee: 4% of the property value
• Real estate agent commission: Typically 2% of the property value
• Mortgage registration fee: 0.25% of the loan amount
• Valuation fee: AED 2,500 to AED 3,500
• Property insurance: This is based on your property value and insurance provider

Budget for these costs ahead of time so that you can avoid financial strain during the mortgage process.

Step 8: Get your pre-approval sorted

Obtaining a mortgage pre-approval from a lender can strengthen your position as a serious buyer not just to banks, but to property agents and sellers.

Having this helps to have a clear idea of how much you can borrow so you can set a realistic budget for your property search. Pre-approval also speeds up the final mortgage approval process once you find your property.

Step 9: Consult with a mortgage broker in advance

A mortgage advisor can help give you market insights and guidance throughout the mortgage application process. They can help you compare different mortgage products, understand the fine print, and choose the best option for your financial situation.

Mortgage advisors are also able to negotiate with all the banks to get you the best payment terms that suit you and your budget.

Our in-house experts can definitely be of help too! Drop us a line to work around your mortgage and to help with your property search!