The different types of mortgages and how to choose the right one for you?!

Buying a property is more than just a financial transaction; it is also an emotional journey. Everybody has a different idea of what their ideal house would look like and the level of safety and lifestyle it would offer them and their families. While we often get carried away and tend to put off the more time-consuming but equally important part of choosing financing and payment options, we often spend a lot of time daydreaming about what our ideal home might look like.

Your options for financing a property in the UAE

While considering to buy villa in Dubai or getting a property for sale in Dubai, most people in the UAE think about getting a mortgage loan for a variety of reasons. The most frequent explanation is that most people either don't want to or can't afford to pay the full price of a house or piece of property all at once. They would rather divide the costs into installments spread over a number of years. Therefore, it is essential for anyone who intends to purchase any type of real estate such as studios in Abu Dhabi to have a basic understanding of mortgage loans and the different kinds of mortgages that are offered in the United Arab Emirates.

What does mortgage mean?

Let's first clarify what a mortgage loan is before we discuss the different types of mortgages. An instrument used to finance real estate is the mortgage. Mortgages are "secured" loans, where the property being financed is the collateral offered to the lender in the event that loan terms are not met (such as payment defaults, etc.).

Types of mortgages in the UAE:

1. Variable Interest Mortgage

In the case of a variable-interest mortgage, the amount of interest paid on the total amount still owed is determined by the applicable interest rate at the time an installment is due. A variable-rate mortgage's interest is not a fixed amount but rather a percentage that fluctuates with the change in the applicable interest rate as measured by the "Emirates Interbank Offered Rate" (EIBOR).

For example, if you obtain this mortgage while getting a 2bhk for sale in Dubai, the benefit of this mortgage type is that, should they occur, you can benefit from lower interest rates. This also holds true for an increase in interest rates, which is a risk factor to be considered when evaluating this kind of loan. The majority of the time, people turn to this kind of loan when the interest rates at the time of the loan are higher than usual or are predicted to decrease in the near future.

2. Fixed Rate Mortgage

Loans with a fixed interest rate for mortgage repayment are known as "fixed rate mortgages”. A fixed rate mortgage typically has a shorter tenure, or loan repayment period, than five years. One benefit of this type of mortgage is the stability it offers while guaranteeing that you are aware of the full amount you must pay back at the end of the loan term, including the principal amount of the loan as well as the interest amount.

Due to the clarity, they provide regarding the required payments throughout the life of the loan, from the first to the last installment, some people may view this type of mortgage as a secure option. Despite its benefits, this clarity prevents you from taking advantage of paying a lower interest rate in the event that rates decline in the future.

The option of obtaining a fixed rate mortgage will not be the best for you if the interest rates at the time of obtaining the loan are relatively high or are anticipated to decrease in the future. In any case, when you apply for a mortgage loan, it is helpful to seek the advice of a mortgage broker or a qualified consultant to better understand market trends.

3. Remortgage

When you choose to move your current loan to a new bank or financial institution, this mortgage option is an option. For instance, if you take out a mortgage to buy a property for sale in Dubai and later discover a financing option from another bank that is better suited to your needs, you can remortgage your home under certain conditions.

4. Capped Mortgage

The fixed maximum limit that the rate to be applied to your mortgage increases to distinguish this type of mortgage. Although your mortgage has a variable interest rate, it is capped at a certain amount that cannot be exceeded even if the bank's interest rates rise at any given time. The capped rate is decided upon when you apply for your loan.

5. Offset Mortgage

A type of loan known as an offset mortgage connects one or more of your savings accounts to your loan account. Your savings will lower the principal balance of your mortgage, resulting in a reduction in your overall interest costs.

How to choose the right mortgage for you?

The majority of borrowers choose fixed-rate agreements lasting between two and five years. This is due to the fact that it makes their repayments for the duration of the deal predictable. That does not necessarily mean that is the best choice for you, though.

For instance, you would lose out on lower monthly payments if the base rate of interest were to decrease. Of course, the opposite would be true if the base rate of interest were to increase.

So consider whether you prefer more certainty or flexibility. The duration of the mortgage term is another important factor. Although 25-year terms have typically been the most popular, as home prices have increased, more people are choosing 30-year mortgage terms to reduce their monthly payments.

Choosing the best mortgage, whether you are remortgaging or purchasing a home, can save you hundreds or even thousands of pounds. Searching for the best offer? Consider using the Yallah Mortgage Calculator.

It can be tough to obtain a mortgage, so we are here to help.