While there are a myriad of mortgage options in the UAE, some products are offered by conventional banks and others by Islamic financial institutions. So what is the difference?
The first thing to note is that the UAE mortgage cap – a regulation limiting the amount banks lend to customers – applies to the entire banking sector as do the standard home buying costs. These include government transfer fees as well as registration, estate agent, valuation and conveyancing charges.
However, the two types of mortgages are handled differently.
With a conventional mortgage, a bank lends money to purchase a new home and charges interest on that loan. It sounds straightforward but the rate of interest can be calculated in two different ways. While a reducing rate is based on your outstanding balance, a flat rate charges on your principal amount for the duration of the term. Mortgages can be advertised using either method so compare like for like.
Other fees include a mortgage registration fee (0.25 % of the loan) and an arrangement fee of up to 1 percent of the loan amount – this varies widely between the type of loan you choose and the bank you borrow from. Banks can also charge miscellaneous fees such as charges for liability letters or copies or property documents.
Also if you choose to pay off your loan early, you can be charged an early settlement fee of up to 1 percent of the loan amount or a maximum of Dh10,000. The advantage here is that the loan becomes cheaper as you gain back interest you would have paid in the future.
An Islamic home loan works differently. Because Islamic financial institutions are forbidden from earning interest, the bank buys a property on behalf of the customer and re-sells it to them at a profit. The buyer then pays the bank back through monthly installments; this is based on the concept of Murabaha. Other Islamic concepts applied include Ijarah, a buy and lease back arrangement, which is useful if buying a property off-plan as no payments are made until the property is completed.
Another advantage of a shariah-compliant home loan is there are no additional interest payments for late payments. However, it may charge a fixed fee. And, remember, Islamic banks need collateral to protect against default so the property is registered to the bank until all mortgage payments are complete.
[Related:Islamic banking – How does it work?]
Also, beware of the early settlement process. While, the Central Bank guidelines still apply, the concept of early settlement does not exist in Islamic finance. This means, in theory, customers could be liable for the the future profit rate. However, it is at an Islamic bank’s discretion whether to apply this or not.