Wednesday, 12 March 2008

Dubai Property Mortgages - There are plenty of options

If you are looking to buy property, most of us will require a mortgage. It also makes sense to use borrowed money to maximize your position in the property market and to avoid large sums of capital being locked up. The mortgage market in Dubai is still very much in its infancy and I stress that you consider all the options open to you. By contrast, the UK has over 7000 mortgage options so most UK property investors seek the help of a Broker to present all the best possible solutions before embarking on a purchase. Mortgage Brokers are here in Dubai - they are just a bit more difficult to find. Here are some of the financial points you should consider before buying property in Dubai.

Can you afford it!

A relatively straightforward point but one that many overlook. The careful balance between buying your dream home and then being able to pay for it is crucial. Banks do not like repossessing property and facing the trauma of losing your home, penniless and possibly still in debt, is one we would rather not contemplate. Certainly in the UK, many house owners faced this dilemma when interest rates rose significantly in the '80's. It is widely recognized globally that interest rates are due to rise so one should be aware that being able to afford it now and possibly if rates raise should be a serious consideration.

Getting your budget right should be your prime objective before you start picking out curtains. Interest rates in the United Arab Emirates have already fluctuated and many local mortgage providers have the ability to alter interest (sometimes referred to as profit rates) as they wish. Interest rates not only vary between the local providers but can do so depending on what project you are purchasing.

Check all avenues of finance and be aware of Banks offering you too much lending. It may sound nice that a Bank is willing to lend you lots of money based on your present income (salary multiple) but what happens if you lose your job. Regardless of being fired or worse through serious injury, illness or death, you will still have to pay back the money you have borrowed. Unfortunately your bills do not die with you so it would be prudent to get some form of Loan Protection to ensure this issue is covered in the event of the unthinkable.

Loan Protection

Some local banks offer some form or indeed demand Loan Protection. Once again, this is an opportunity to engage the services of a Broker who may identify existing insurances you may already have acceptable to the Bank or indeed offer a policy that is more cost effective and internationally secure than that presented to you initially. Moreover, there are policies that can cover your Mortgage issues and at the same time deal with the importance of securing the protection of yourself and your loved ones overall.

Be mindful that if you have no cover and the bank demand repayment in full for whatever event, it could be that your property has not gained sufficient value to cover the loan amount or indeed cannot be sold for some period of time. Get yourself covered and remove the uncertainty.

Getting the right mortgage

A good Mortgage Broker has access to all the local providers of finance plus a wide range of mortgage and finance solutions with the top International Banks and Building Societies around the world. They can arrange finance in various currencies and secure the lowest interest rates for their Clients. For example, the typical borrowing rate in Dhs is about 6.5% which equates to nearly 9% in Ј terms. Since the base rate in the UK is about 4.75% it is clearly cheaper to finance your Dubai property purchase from the UK is possible. Moreover, a Broker can locate the most competitive fee structures and help select the right mortgage for you. You might need help determining whether you need interest only, capital and repayment, buy to let or other forms of mortgage in various currencies.

Presently, locally offered mortgage options are quite limited and few investors realize they can go overseas for alternative options. An investor may end up financing a project part locally and the other from international sources. At present, securing international financing can only be achieved if you retain assets outside of the United Arab Emirates. These assets for consideration can be other property, alternative income sources, offshore investment portfolios or similar securities. Typically, an investor can borrow up to 80% of the value of their overseas property (less any outstanding debt) to finance a project in Dubai. This is particularly popular with investors from the UK since the Ј/Dh is very much in their favour and they have the ability to rebase their capital gain threshold and mitigate their Inheritance Tax issues. If you do not know how this could affect you then a Broker (worth his salt!) should be able to guide you accordingly since you are unlikely to be offered this information from local lending sources.

Similarly, be aware that your Mortgage Broker back at home is duty bound to report to his Regulator (which in turn goes to the Revenue Authority) the capital raising/equity release work he has just done for you. If indeed you believe that just sending this money overseas to buy property away from the gaze of the taxman is OK - think again. In order to effect a tax efficient property purchase in another country like Dubai, you need to consider the correct uses of offshore Company Structures and Trusts.

Using Offshore Companies

International Banks are familiar with the uses of Offshore Structures when purchasing property. Typically terms are offered on a corporate basis but the savings for preserving wealth far exceed the additional fees to arrange such structures. SO apart form the potential tax savings, in the United Arab Emirates there are further considerations with regards to the costs involved in property transfer fees and how an offshore company can circumvent this issue. Moreover, the legal framework in the Emirates is that based on Islamic principles and one must be aware how Sharia Law can affect your property in the event of death. Regardless of your own religious beliefs or if you have a Will, in the event of your demise the UAE Courts will disseminate your estate here as per Sharia.

Presently, UAE based lenders will not offer loan terms to offshore entities but it is hoped this may change in future since so many overseas investors are demanding this facility before investing into the Dubai Property market. Clearly, the local Bank that offers such a service first will be inundated with business.

Get help...

Since buying property is probably the largest investment most people will make, it is financially prudent to seek the best advice and expertise. Property has shown steady returns for a number of years and it is a key element in your overall financial planning strategy. However, making avoidable mistakes in your property portfolio can have disastrous consequences.

Get as much information as possible from the likes of a Mortgage Broker and not just the first bank you bump into or that has a logo on a website. Similarly, speak to various realtors on the suitability of your purchase, Lawyers for the legal position when purchasing in Dubai, Surveyors to ascertain the true value of your home, Insurance types to protect your abode plus Tax & Financial fellows to make sure you have structured your purchase the most effective way.

Choose the right budget that allows you to comfortably afford your property, the repayments you will have to make (even in the event of an interest rate hike) and to fund the protection measures essential in house purchase. Hopefully you will still have some left over so you can pick out those curtains!