Why the interest rates are NOT the most important aspect of a mortgage
Just looking into the advertised mortgage interest rate while taking a home mortgage finance is a primary mistake that every borrower do. Mortgage Interest rates are not the only thing that will give you the best deal on your mortgage. There are a bunch of costs that are involved in acquiring a mortgage. They may include arrangement and processing fees, life insurance, and other charges that come due in order to get the loan.
So before acquiring a mortgage consider this thing to get the best deal.
Does the bank charge an arrangement or processing fee? If so, how much is this?
Few banks will not cost you any processing fees or charges, but many will charge 1.5 % or higher property value. These fees will greatly impact on your budget but they can also negotiate depends on your requirement. So be prepared of these charges while applying for a mortgage.
Do you have to take the bank’s in-house life insurance or can you assign a policy?
Life insurance is compulsory when you take a mortgage in the UAE. They will charge you separately from the loan for life insurance. Because this is the only way for the bank to guarantee the loan is paid in full in case of death. In general, they charge you 0.4% to 0.8% per annum on the decreasing mortgage balance, some ask for level term insurance. It will be benefitted if you assign an external life insurance policy that provides considerable savings.
Is there a requirement for Salary Transfer?
Many banks will easily lend you a loan on a salary transfer account. Be cautious in doing so because on salary transfer your finances are appropriately managed by the banks. The salary transfer agreement will oblige you to advise the bank of any change of employment, even it is like moving for a better-paid job. The banks will generally hit panic stations and assume the client will abscond, potentially freezing clients’ accounts and funds.
What is the reversion rate or second period rate? Is this linked to EIBOR or a bank base rate?
Many banks tend to attract the customer with a low rate of fixed-term loans between 1 to 5 years. But this fixed rate will revert once the introductory period ends .the reversion rate is the far higher rate that is a margin over EIBOR. If customers forget about the reversion rate they are forced to pay more interest after the fixed period.
However, you can lessen your burden by remortgaging your property with a new or existing bank with a new rate. The UAE Central Bank regulation of a maximum penalty of 1% (and capped at AED 10,000 max.) to refinance a mortgage with another bank.
Alternatively, you can opt a variable rate linked to EIBOR from the outset while taking a mortgage.You will not come across any reversion rate. But keep in mind the payments could go up (or down) from day one in line with EIBOR fluctuations.
Are overpayments allowed and what if the mortgage is settled early?
Many people want to clear their debts as soon as possible at the time of the hike in their income. Many banks in UAE will offer you Overpayment allowance f 20% per annum penalty-free. This will reduce your interest rate and the loan period by paying a lump sum amount at a time. It is important to remember, that the UAE Central Bank now allows the banks to charge up to 3% on early settlement or overpayments without any cap. This should be applied in an appropriate and fair manner.
Here’s how all of this impacts that headline rate you’re seeing:
In the UAE, the Interest rate will be ranging from 2.99 per cent to 5 per cent. So if you look the product only by the headline interest rate of 2.99 % this will attract many but you may not aware of internal charges so here we give you a comparison to a rate of 4.29%to consider what is potential of
- 1% arrangement fee
- 0.66% life insurance
- The requirement for Salary Transfer
- Reversion rate of after 1 year
Compared with a headline rate of 4.29% fixed interest rates for 2 years:
- Zero arrangement fee
- 0.2% with external life insurance
- No requirement for Salary Transfer
¬ Reversion rate after 2 years of 4.99%
- Headline Rate 2.99% vs 4.29%
- Arrangement Fee 1% vs 0%
- Life Insurance 0.66% vs 0.20%
- Total Annual Percentage rate: 4.65% vs 4.49%
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