What factors affect the cost of a mortgage?

In order to get a mortgage in Dubai, there are several factors that one has to consider with regards to the total cost of the loan. These factors can have a huge impact on the amount of payment that is due monthly as well as the total amount of interest paid out to the end of the loan. Here’s a detailed look at the primary elements that impact mortgage costs in Dubai:

Interest Rates

The interest rate is perhaps one of the most determining factors that impact on the cost of mortgage. Mortgages in Dubai are of two types the fixed rate and the variable rate. Such rates are locked at certain intervals whereby the rates are not fluctuating and the payments remain same. The variable rates in turn are linked with the Emirates Interbank Offered Rate (EIBOR) and differ at different times due to market conditions. Due to the relation between EIBOR and the variable mortgage rates, if the EIBOR rises then the monthly installments also rise.

Central Bank Policies

The changes of EIBOR which is set by the UAE Central Bank also have an impact on the mortgage rates. Changes in the reference rates affect the amount of money that has to be paid for borrowing. For instance if the Central Bank decides to increase the interest rates to tame inflation, the mortgage rates will also rise hence the cost of borrowing will be high.

Loan-to-Value Ratio (LTV)

The LTV ratio shows the ratio of the loan amount in comparison with the property value. In Dubai, it is understood that LTV ratios that are higher will lead to higher interest rates as it is considered that those are high risk to the lender. For instance, a mortgage with a loan-to-value ratio of 80/100 may have higher interest rates as compared to a mortgage with a loan-to-value ratio of 60/100.

Credit Score and History

Credit score and credit history are some of the factors that are used to come up with the mortgage costs. Higher credit score enable one to get better interest rates and loan conditions. This is because the lenders are interested in knowing the creditworthiness of an applicant in order to know whether to lend the money to him or her. In this case, if a borrower has a favorable credit history and has been paying the mortgage on time then the interest rates will be low thus lowering the cost of the mortgage.

Economic Conditions

There are other factors that may influence mortgage rates and they include the general economic conditions of the world and the country in particular. When the economy is booming this leads to high demands for houses due to the available employment opportunities which may lead to a hike in the mortgage rates. On the other hand, in a depressed economy, the Central Bank may decide to reduce the interest rates with a view of encouraging borrowing and investment, and the rates for mortgages will also come down.

Property Type and Value

Other factors include the type and value of the property since different types of properties will cost different amounts of money in terms of mortgage. Some properties or types of property such as high value properties or commercial real estate may command different interest rates than normal residential properties. Also, there are some differences in the rates that can be provided by lenders for the under construction properties and ready properties.

Employment and Income Stability

Stable job and regular income is always considered preferable by the lenders when considering borrower’s application. Fixed income earners especially those with a good employment record may be offered better rates than the freelancers or people with unstable income sources. It is also important to prove one’s ability to pay based on a regular and steady income so as to obtain lower interest rates on loans.

Down Payment Size

A large down payment means less loan amount which may lead to lower interest rate. It is usually easy to get better rates from the lenders if you are able to put a lot of money down as a deposit since this is less risky for the lender. In Dubai, it is common to pay a down payment of at least 20% but putting more money down will also lower mortgage payment.

It will be useful to know these factors to be able to get a better understanding of the mortgage terms and conditions in Dubai. It is therefore possible to reduce the cost of the mortgage and thus the cost of homeownership through credit score management, coming up with a large down payment and being aware of the economic conditions and Central Bank policies.


Factors Affecting the Cost of a Mortgage Quiz

Test your knowledge on the factors that affect the cost of a mortgage. Once you complete the quiz, click the button to see your score and the correct answers.

  1. What is one of the primary factors that influence mortgage interest rates in Dubai?




  2. How does the Loan-to-Value (LTV) ratio affect mortgage costs?




  3. Why is your credit score important when applying for a mortgage?




  4. How can economic conditions influence mortgage rates?




  5. What role does the down payment size play in determining mortgage costs?




Quiz content credit to 95dubai.com