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With favourable rates, fee waivers and a lower loan-to-value ratio, the UAE housing market has suddenly started to look a lot more favourable for would-be-buyers across the Emirates. Should residents take advantage of these offers and get on the property ladder or be wary of falling into a debt trap amid a global recession?
Zawya spoke to Giedre Dovidonyte, an independent financial advisor at UAE-based Holborn Assets, to find out more about the risks.
WHICH COMES FIRST: HOME OR HOME LOAN?
Achieving homeownership is about much more than simply buying a property; it is about creating a home, says Dovidonyte. The current low-interest rate environment may be encouraging people to seriously explore and assess offers in the real-estate market, but would-be buyers should be fully aware of what they are letting themselves in for.
“Borrowing money to purchase a property is often found to be a great decision as it can enable a potential buyer to acquire a significant asset and to ultimately achieve a profitable return, not only on your investment but also on the money that the bank has kindly lent to you,” she explained. “However, you must plan such a course of action wisely: you must proceed carefully and cautiously. Before you come to any final decision, it is important to evaluate your household finances and consider how robust your financial planning will be should economic circumstances change.”
Dovidonyte says would-be-buyers should start by examining how borrowing a certain amount of money could affect their financial circumstances. “If you have an expensive mortgage which is higher than the market price of your home, any fall in house prices can tip you into negative equity. This is the situation where your mortgage borrowing exceeds the value of your home.
She continued: “Negative equity is not a problem unless you find yourself needing to sell your home. This is why it is so important that you conduct a financial health check and prepare for the unknown before setting out to purchase a property.”
A high level of borrowing can also mean your household finances may become vulnerable to factors such as a rise in interest rates. “Such a situation would push up the regular amount you spend each month on loans, unless you take out a fixed-rate mortgage. Please stress-test your financial decisions.”
AM I AWARE OF POTENTIAL PITFALLS?
According to Dovidonyte, the main risk factors associated with a mortgage include a fall in your income level, an increase in your mortgage repayments, and a decrease in the value of your home.
“The major dangers that could hinder you in dealing with these variables are unemployment and ill-health issues,” she noted. “To cater to these risks, you must have an emergency fund [see below] and critical illness cover in place. Critical illness cover simply provides you with a lump-sum payment should you become critically ill. Such cover can be bought for a reasonably small monthly premium.”
AM I READY FOR ANY FINANCIAL EMERGENCIES?
An emergency fund can help would-be buyers to cope during a period of unemployment and provide them with money for unexpected expenses, Dovidonyte said. It must, therefore, be one of the key priority goals for every individual and for every family to help to prepare for the unknown. “The economic cycles teach us that some things will always happen. We don’t know precisely what will happen, but we know that something will happen. These global cyclical events usually last for only two years as an absolute maximum.”
Dovidonyte added that would-be buyers should ensure their emergency funds cover expenditures for a minimum of three to six months. “You should ask yourself what amount makes you feel comfortable and also consider if you have any other liquid (readily accessible) assets and investments that you could draw upon.”
IS PROPERTY A SAVVY INVESTMENT?
Property should play a significant part in everyone’s investment portfolio, says Dovidonyte, and so, as a rule, it is a savvy investment. “Historically this asset class has outperformed any other investment. The great part of borrowing is that you obtain growth on your money and a bank’s money. Furthermore, if it is a rental property, someone is going to pay off a debt for you. This means that you could have a debt-free asset delivering retirement income for you at a later day.”
However, there are a number of questions a would-be buyer must first ask and various factors they must consider before reaching a decision. “You must look at your overall household financial liabilities as a percentage of your net worth. You must ask yourself if you can afford to have your cash locked up long-term. You must have a reasonable understanding of the current market in the country, city and area in which you are considering buying.”
She added: “And, finally, it is very important that you project the potential of the capital growth and the rental yield that you can earn should you plan to rent out the property.”
ARE YOU TAKING ON THE RIGHT TYPE OF LOAN?
It is vital, said Dovidonyte, that would-be buyers understand the options which are available. “Firstly, you need to decide if you want to be paying off the property value or just the interest. With interest and repayment mortgage, your payments go towards reducing the amount you owe as well as paying off the interest. With an interest-only mortgage, you only pay the interest on the amount you have borrowed each month.”
The second step is for would-be buyers to decide if they prefer a fixed-rate mortgage or a variable-rate mortgage where the interest rate can fluctuate throughout the period of the loan to reflect changes in the economic cycle. “Your decision should be made considering the market conditions and if you could secure a great fixed rate.”
The average down payment for purchasing a property in the UAE is around 28 to 33 per cent, including all fees and depending on whether you are a UAE national or an expatriate, but it can vary from country to country, Dovidonyte said.
(Reporting by Jennifer Bell, editing by Seban Scaria)
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
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