Dubai is one of the top cities of the world to live in and we are fortunate to reside in it. On an ongoing basis, many new professional expatriates arrive in Dubai with a planned financial savings objective of 2-5 years. But once you have completed 2 years, departing becomes a distant dream. In fact, due to the unmatched lifestyle, which Dubai offers, leaving and adjusting to other cities becomes a nightmare.
Majority of the expatriates in Dubai live in a rented accommodation. Rental increases and house relocations are imminent in Dubai as with any new economic growth story and one often wonders if he/she should own a property in Dubai.
The following questions will help you in arriving at buy v/s rent decision more objectively
1. Is Dubai a good property investment destination?
In our view, Dubai scores very well on the following counts and seems to the hotspot for any property investment decision for next 5 years..
a) Economic Growth & Political Stability
b) Lifestyle and Infrastructure
c) Quality of Properties on Offer in Dubai
d) Freehold Property Ownership with Clear Title Deed
e) Price of Properties v/s other Cities in the World
f) Rising Rental Incomes & Increasing Property Values
g) Future Market Supply
h) Expo 2020 Hosting
If you feel that the above mentioned growth indicators are not sufficient reason for buying a property, you can continue to rent property in Dubai.
2. Can I buy a property with existing financial condition? What will I achieve by buying a property?
This is very important question to ask yourself when you are purchasing a property with a home loan/ home finance as no amount of investment return or the beauty of your leveraged home can beat the peace of mind of living with no liability.
Usually, banks here are very professional in evaluating the financial position and stability of a customer. However, the following points should be considered by each individual when purchasing a property with home loan / home finance
a) If you are Salaried, how secure is your employment and how financially stable is your employer? Or if you are Self Employed, how good is your business and how well is it growing?
b) Do you have sufficient funds to make the required down payment for purchase of your property? U.A.E. Central Bank has mandated minimum 25% Down Payment for Expatriates wanting to purchase their first property in U.A.E. if the property value is less than AED 5 Million. Besides the down payment, you would also need your own funds to pay brokerage fee, land department transfer fee, mortgage registration fee, etc. As a rule of thumb, one can say approx 1/3rd of the property value should be available with you as your own funds.
c) How much existing leverage you already have? U.A.E. Central Bank mandates your fixed monthly obligations to banks/ financial institutions should not exceed 50% of your monthly income.
d) How much rent are you currently paying for your accommodation and how much additional monthly payments you can make? Based on the currently prevailing home loan / home finance rates of approx 4.5% p.a. on a 25 year home loan, the monthly installment for AED 1 Million works out to AED 5,558 i.e. approx AED 67,000 Annual Cash Out Flow.
As an example, if you are already paying annual rent of AED 67,000/- from Cash flow perspective, you already have the confidence of servicing such a liability month on month and the same cash which is being used for rental payment can be utilized for home loan / home finance servicing.
3. What are the risks if things don’t work out as per my Plan?
Life is fragile, un-predictable and occasionally catches us on the wrong foot. We need to be ready for some unpleasant and unforeseen challenges that life may throw at us. Below is the list of some common risks that an average individual may face during his home loan / home finance servicing tenure.
a)Loss of Employment or Business downturn: When we lose employment or face a business downturn, most people start imaging the worst case scenarios like I will never get an employment or I will never make profits in new business venture. But reality is, sooner or later people find a suitable and equivalent revenue earning employment. The best way to avoid any issues with the banks/ financial institutions who have financed your home loan facility is to keep in reserve an amount of 6 to 12 months installment. This will give you sufficient room to either find alternative employment or rent the property or to sell the property. The market is currently witnessing a boom and in all probability your capital appreciation and the principal repayments will only improve your equity in the property.
b) Loss of Life: Most of the banks in U.A.E. mandate life insurance assignment before disbursing your home loan. This ensures your loan outstanding is settled in case of loss of life and avoids installment payment hassles for your legal heirs.
c) Loss of Property: Most common property related risks like fire, earthquakes, flood, etc. are duly covered when buy a property with Home Finance/ Home Loan.
d) Major down turn in economy leading to a downfall in property prices: Any investment, be it equities, debt instruments or fixed deposits are not risk free and Real Estate is no exception. However the limited volatility and physical security that real estate offers is unrivalled to any other asset class. Home Loan / Home Finance repayment periods stretch up to 25 years whereas real estate cycles run for five to ten years. As long as one is not overleveraged/ overexposed and has stable employment/ income source most of the people come out as winners only on a real estate investment.
We are confident that above questions will give you sufficient food for thought in taking the right decision. If you need any assistance or clarification on different banks Home Finance/ Home Loan products in U.A.E, please get in touch and we would gladly assist.