With a baby on the way, my wife and I were pretty excited! But realizing that a new born demands extra space, we started our hunt for a larger apartment – one that met our various criteria such as proximity to work, amenities, building age, floor etc. Once my wife identified an apartment in one of the newer buildings in the Greens, we began the hasty process to quickly select a mortgage company.

Following our poor experience buying property in 2008, we are very wary of a new loan. But it seems the real-estate market changed radically between 2008 and 2016 – it is no more a banker’s market. Rather from the highs of 8% interest that I paid for our 92 sqm apartment then, rates had fallen to as low as 2.75% + Eibor.

Comparing our options – Doing the math

For the purpose of the loan, we met with 8 different banks to understand the various home finance offers. With the new apartment worth AED 3.1 Million, we decided to put AED 850,000 towards down payment and apply for a total loan of AED 2.25 Million for 17 years.

In the beginning it seemed all very confusing because every bank seemed to offer different interest rates, often fixed for 12 or 24 months before EIBOR kicked in. Every bank used a different period for the Eibor with a few using the 3 month rate while most using the 6 month rate. At the time of writing, the 3 month Eibor was 1% while the 6 month Eibor was 1.3%.

But instead of focusing on the monthly installment and interest rate, we focused on the Total Interest Payable over the period of the loan. That represents the cumulative interest payable to the bank and this single figure helped us make an educated decision in choosing our mortgage lender.

To calculate the monthly payments, lending institutions use Excel’s PMT function which calculates the payment for a loan based on constant payments and a constant interest rate. Nearly all banks were offering a low fixed interest for the first 12 or 24 months. During this period the principal and interest portions are re-paid in an approximate 60-40 split. But post the honeymoon period, the principal and interest split changes to an even 50-50. This means, one pays more towards the interest rather than the principal. Banks use this to recoup majority of the interest in the beginning, in case the debtor tries to pre-pay the loan quickly. The principal is simple – the longer the loan duration, the greater the interest accrued.

Consider the example below from a popular local bank that offers a fixed base rate of 2.99% for the first 12 months and then 2.99% + 6 month Eibor.

Month # Monthly payment (AED) Interest rate Interest amount (AED) Principal amount (AED) Interest % repaid Principal % repaid
1 14,082.44 2.99% 5,606.25 8,476.19 40% 60%
2 14,082.44 2.99% 5,585.14 8,497.30 40% 60%
12 14,082.44 2.99% 5,371.02 8,711.42 38% 62%
13 15,474.03 4.29% 7,675.10 7,798.94 50% 50%
14 15,474.03 4.29% 7,647.22 7,826.82 49% 51%

The next criteria that we considered were the maximum pre-payment amount and early settlement fees should we choose to sell the apartment or pay off the loan sooner than the loan period. Nearly every bank limited the annual pre-payment amount and imposed Central Bank guidelines of either 1% or AED 10,000 as early settlement fees.

Other criteria such as waiver of pre-approval fees and reduced or zero processing charges were the final pillars, albeit with a lower emphasis, of our decision making process.

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The bank that made the final cut

The bank that we finally selected offered us the following:

1. Primary Feature

A negotiated constant base rate of 2.35% + 3 month Eibor for the entire loan period – No gimmicks with low interest rates for the first 12 or 24 months. This also gave us the lowest amount of total interest payable.

Month # Monthly payment (AED) Interest rate Interest amount (AED) Principal amount (AED) Interest % repaid Principal % repaid
1 14,481.52 3.35% 6,281.25 8,200.27 43% 57%
2 14,481.52 3.35% 6,258.36 8,223.16 43% 57%
12 14,481.52 3.35% 6,235.41 8,246.11 43% 57%
13 14,481.52 3.35% 6,212.39 8,269.13 43% 57%
14 14,481.52 3.35% 6,189.30 8,292.22 43% 57%

We were able to negotiate the rate down by a few points further, due to my wife’s positive credit rating derived from her low debt ratio. The saving in Total Interest Payable between our selected bank and other banks ranged between AED 144,000 and AED 391,000.

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2. Secondary Features

a. Pre-Payment – Up to 25% of the principal can be repaid annually to reduce the outstanding principal, without incurring any penalty.
b. Early Settlement – Zero early settlement fees after three years. For early settlement during the first three years, it is as the per the Central Bank guidelines.

3. Other Features

a. Pre-approval fees – Zero pre-approval fees while most other banks were charging between AED 2,000 to AED 5,000 and were willing to adjust it against processing charges.
b. Processing charges – Reduced from the standard 1% to 0.5%, however nearly all banks were willing to negotiate on these charges.

In summary, when choosing a home loan..

  • Focus on the Total Interest Payable as the key deciding criterion, rather than focusing on the short-term gain offered by low interest payment periods.
  • Negotiate at every stage!

[If you’re looking for a home loan, don’t forget to compare before you commit. Browse through over 67 different  home loans on Souqalmal.com.]

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Manish Punjabi advises UAE businesses on how to get the most from their communication and network infrastructure and he has over 14 years of marketing and sales experience across Europe, Middle-East and Asia.

Disclaimer: The views expressed in this article are solely the author’s and do not necessarily reflect the opinion of Souqalmal.com.