Buying a property in the UAE’s real estate market is a dream for many. While upfront capital payment can be challenging, there are two popular property financing options, mortgage and payment plans. Mortgage vs payment plans is a long debate – so, what’s the right option?
Scroll down to learn the difference between a mortgage and a payment plan.
- Understanding Mortgage
- Understanding Payment Plans
- Mortgage vs Payment Plans – A Factual Comparison
- Mortgage vs Payment Plans – The Right Choice
- FAQs
Understanding Mortgage
Mortgage is a popular option for residential, commercial and investment properties. It is a loan taken from a bank, subject to interest payments. The UAE mortgage law regulates borrowers’ and lenders’ rights and obligations within the country.
Mortgage duration and percentage depend on the borrower’s financial situation and property value. However, here are some predefined cases:
- Expats can get a maximum of 80% property loan while 20% must be paid by them as a down payment.
- Properties above AED 5 million require a 30% down payment.
- Properties below AED 5 million require a 20% down payment.
- The UAE nationals can apply for an 85% property mortgage while they must pay the other 15% as a down payment.
- Off-plan property mortgages have a set loan-to-value ratio (LTV) of 50%. This means buyers can get a maximum loan of 50% of the property value.
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Types of Mortgages
Financial institutions offer different types of mortgages in the UAE, as listed below:
- Fixed-rate mortgage
- Variable-rate mortgage
- Remortgage
- Offset mortgage
Example
Suppose an individual wants to buy a 1-bed apartment in Dubai and the total cost is AED 1,000,000. If any buyer doesn’t want to pay the costs upfront, they can approach a bank and apply for a property loan. The buyer gets a 50% mortgage (AED 500,000) with a fixed interest rate of 3% over 15 years.
This means the buyer has to pay off the loan in 15 years and the interest rate will remain the same for the entire period.
Understanding Payment Plans
The second financing category is payment plans. In simple terms, a payment plan by a real estate developer gives a buyer flexibility to pay the property value in instalments. Percentage and duration vary depending on the type. Additionally, payment plans are usually interest-free.
Types of Payment Plans
Down payment under these plans can be as low as 5% with some properties available at 0% down payment. Here are the four types of payment plans in the UAE:
- Post-handover
- 10:90
- Payment in instalments
- Rent to own properties
Example
For instance, there is a 3-bedroom villa for sale in Arabian Ranches 3 for AED 2,491,000. The developer is offering a payment plan of 10:90. This means that the buyer has to pay a 10% down payment and 90% as instalments for a specified period.
Mortgage vs Payment Plans – A Factual Comparison
Now that we know where the two financing options stand individually, let’s compare them to see what’s ideal for you.
| Mortgage | Payment Plans |
| Offered by | |
| Financial institutions such as banks | Project developer |
| Payment Duration | |
| Usually, it ranges from five to thirty years | Usually, it ranges from two to ten years |
| Down Payment | |
| 15% to 30% | Varies by project |
| Processing Fee | |
| 0.25% charged by DLD. There are also additional registration charges. | There is no additional processing fee. |
| Interest Rate | |
| Yes | Usually no |
| Visa Requirement | |
| Yes | No |
| Ownership | |
| By paying property costs upfront with a loan, the buyer can get property ownership. | Ownership is usually given after a certain payment. |
Requirements to Avail of a Mortgage or Payment Plan
The process for a payment plan is quite simple and there are no additional requirements.
On the other hand, a commercial mortgage or home loan in the UAE requires fulfilling a set of eligibility criteria such as:
- UAE residency visa
- A minimum salary range
- Emirates ID
Mortgage vs Payment Plans – The Right Choice
The right choice solely depends on a buyer’s preferences. However, both options have some merits and demerits. Here are some important factors to consider:
1. Repayment Duration
Mortgages usually have a long repayment duration in comparison to payment plans.
2. Interest Rate
A mortgage comes with an interest rate. If a borrower can pay fixed or variable interest rates and has a stable income to support the payments, a mortgage is a good option. However, if the interest rates are exceptionally high, payment plans are a more desirable option.
3. Flexibility
Mortgages are usually for those who need flexibility with payments. However, payment plans are flexible for investors or buyers who can pay off property costs in the short term.
4. Motive
If a buyer’s motive is to settle in the property or build an asset, a mortgage is a suitable option. Whereas, if short-term investment is the motive, payment plans are a better choice.
FAQs
Loan to value ratio (LTV) simply means the amount of loan you can get against a property’s value.
Suppose you get a mortgage to buy a townhouse in Abu Dhabi. If it is fixed, the interest rates will remain the same throughout the period. On the other hand, in a variable-rate mortgage, the interest rates fluctuate depending on market conditions.
Mortgage is calculated based on the property value. Suppose you get a 60% loan on a property value of AED 1,000,000 at an interest rate of 4% annually for 10 years. The estimated monthly mortgage payments will be AED 6,075. Explore the mortgage calculator for further guidance.
That was all about mortgage vs payment plans in the UAE. Now you must know the right financing option for you. If you want to learn about other financing options, here is a comparison of cash vs mortgage.
Property buying was never this much easier. So, what are you waiting for? Explore these top off-plan projects in the UAE to buy your dream home.
