UAE: Best way to buy property – via your developer’s payment plans or bank mortgage EMIs?

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Easy payment plans open Dubai real estate to a bigger market
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Dubai: The UAE real estate market currently presents the most attractive prices and deals, making 2021 the best time to invest in property.

You would either want to purchase property to build your investment portfolio or live in the unit as an end-user. The range of developers’ options on payment plans and attractive bank interest rates on home loans makes it easier to realise your financial goal of buying a home in the UAE.

Although the offers are enticing enough, most homebuyers often get confused about their choice to buy a property – with a developer payment plan or bank mortgage.

For Dubai-based Chirag Ashok Shabnani buying properties on developer’s payment plans is his most preferred choice. He is a business owner, investor cum realtor, who owns multiple properties in Dubai. He has purchased the units directly from Emaar and a few from the resale market.

Chirag Ashok Shabnani

One of his recent purchase is a podium villa in Boulevard Heights in Downtown that he had purchased directly from real estate developer Emaar on a five-year post-handover payment plan and got a 4 per cent DLD (Dubai Land Department) fee waiver.

What is a post-handover payment plan?

In Dubai, when purchasing a ready or off-plan property (property which is available for purchase before it has been constructed) in Dubai, the payment terms are split into instalments which must be paid in several intervals. In the usual payment plans, buyers would complete payments of the entire unit upon the completion, or handover of the property.

Shabnani said, “With post-handover payment plans of 3 years or more, the return on investment (ROI) in the first three years is something that attracts investment, and then the rental income helps in paying off the future instalment. I have purchased several units from Emaar and always try to get the best payment plans from them.”

“There are several transactions I have done with the secondary market too, but here I look for the best deal possible, wherein I can buy the property cheaper than the average traded price in the market, under the present market condition.”

Takeaway #1: When taking a mortgage, ensure your net rental return is higher than the interest payable.

For taking a mortgage for an asset purchased from the secondary market, Shabnani ensures the net rental return he obtains after paying the service charges payable to the developer is usually higher than the interest due on the mortgage.

“It allows to make some money during the mortgage period, and after 15 years, once fully paid, own the real estate asset, which is a form of asset and wealth creation,” he added.

He further stated that buying villas and townhouses on a mortgage is more worthwhile because there is high demand for such assets in today’s market.

The net rental incomes on villas and townhouses are higher since the service charges are lower

– Chirag Ashok Shabnani

“The net rental incomes on villas and townhouses are higher since the service charges are lower, so when paying anything between 3 to 4 per cent per annum in bank/mortgage instalment payments per month, one can absorb this cost and still make 1 or 2 per cent over and above,” he explained.

Takeaway #2: You can save some money with the payment plan option because you are not paying any mortgage interest and other charges for obtaining a loan.

Shabnani said the main benefit of buying on the developer’s payment plan is that you don’t have to pay any interest (mortgage is anything between 2.25 per cent to 4 per cent per year) to the bank.

Also, you save on other charges like insurance and additional small bank charges like mortgage registration fee with the Dubai Land Department, and costs on an early settlement of the loan, if you want to exit from the mortgage before the agreed tenor, he added.

Takeaway #3: You must evaluate the opportunity cost of the money when deciding on the mode of payment.

Shabnani recommended that every investor understands the money’s opportunity cost that is being invested in the asset.

What is opportunity cost?

Opportunity cost is the loss or the benefit that could have been enjoyed if the best alternative choice was chosen.

In other words, opportunity cost is the forgone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.

“As a business person, if I have Dh1 million to deploy into real estate from my earnings every year, I would buy 2 or 3 properties on a payment plan and build a portfolio in 2-3 years, instead of paying Dh1 million entirely today and buy one unit,” he explained.

“That is, if I had Dh1 million, I would buy one property on the instalment plan – pay 10 per cent today, 10 per cent after four months and so on so forth. The balance of between Dh700,000 to Dh800,000 would be used in my business to generate more revenue, generally higher than the net rental of buying fixed assets.”

He said having a diversified portfolio is a must for anyone investor and business person, in particular.

Recommendations from money experts and realtors to help you decide on the best payment option for property purchase.

For any homebuyer choosing from a bank mortgage or payment plan should be based on your current financial state and future obligations to manage the finances.

Takeaway #4: Weighing your future financial situation is as vital as knowing your present needs

Ian Vaughan, Senior Mortgage Consultant at Mortgage Finder said that your cash flow is the main factor determining a mortgage buy and a post-handover payment plan.

Ian Vaughan

“With a payment plan, the repayments are higher than a mortgage as they are covered over a shorter period and on a lump sum basis, for example, a lump sum due every quarter. On the other hand, a mortgage, the payments are spread over a longer period, up to 25 years, and are payable every month.”

“Moreover, developers will often offer discounts to encourage buyers to cover the final handover payment in cash or pay via a bank mortgage. However, with the payment plan option, you don’t get any discount. This means, in some cases, the buyer pays slightly less for the property if they do not select the payment plan option.”

There is also an option for the buyer to initially take a payment plan with a developer and then move this onto a mortgage at a later date, he added.

“For instance, when buying a Dh1.5 million property using developer payment plan with of 30:70, that is 30 per cent covered during the construction phase and the remaining 70 per cent [Dh 1.05 million], will be paid over five years payable quarterly, equating to Dh52,500 per quarter.”

Developers will often offer discounts to encourage buyers to cover the final handover payment in cash or pay via a bank mortgage

– Ian Vaughan

The buyer can opt for a mortgage to pay 70 per cent here since 30 per cent of the property price is paid during the construction phase. “If the buyer takes a 70 per cent loan-to-value mortgage for the outstanding amount of Dh1.05 million a 25-year term with the current lending rate of 2.39 per cent, he will be paying Dh4,653 per month.”

However, you will need approximately Dh17,000 in cash upfront to cover fees associated with getting a mortgage and registering the property, he added.

Takeover #5: You must check and consider what else you could be doing with your money to determine the opportunity cost

Zhann Jochinke, Chief Operating Officer, Property Monitor said that the developer payment plan is usually short and requires you to pay off the property with your money quickly. This is good as you will own an asset free-and-clear sooner, but there is a hidden cost to this – it’s the cost of capital or opportunity cost, he added.

Zhann Jochinke

“With a mortgage, you will have a longer loan tenure and will put in less money each month, potentially leaving you with more money to invest in other ways. If the return on that extra money is greater than the interest component of your mortgage payment, then not opting for a short-term developer payment plan or short tenure mortgage may make sense.”

Takeover #6: Know the different developers’ payment plans to make the right pick that matches your individual needs

Dhiren Gupta, Managing Director, 4C Mortgage Consultancy, said post-handover payment plans offer on ready-to-move-in properties range from 3-5 years.

Dhiren Gupta

“The buyer will pay 10 per cent at booking, and upon payment of 20 per cent, the buyer can move in. After that, pays 8 per cent every quarter until three years from the date of purchase.”

Some developers offer a waiver on a transfer fee of 4 per cent to register the unit under the land department, plus an agency fee of 2 per cent is also mitigated. And some offer an additional incentive of a waiver of the service fee for the initial few years, he added.

Jochinke said that the reduction in the fees paid by the buyer is developer incentives or concessions. “What you need to think here about the incentives is the 2-4 per cent of DLD transfer fees or the ‘X’ number of years’ service fees are being paid for by the developer rather than waived. In the majority of cases, these are being factored into the purchase price, not discounted from it.”

Jochinke recommended, here, to check a comparable unit in the project available as a resale (one that is still brand new and not lived in). “More often than not, it will be selling at a lower price than direct from the developer. One should take that price and add the full transfer fees, the service charges and any other incentive being offered by the developer.”

Post-handover payment plans offer on ready-to-move-in properties range from 3-5 years

– Dhiren Gupta

“Also, most likely add 2 per cent broker commission, work out the mortgage costs and then compare that to the developer’s direct price and payment plan instalments to see how they compare.”

For off-plan purchases, most payment plans by developers are now trending back towards a higher split of payments during construction (60-70 per cent) and smaller post-handover amount with the post-handover period typically being 2-3 years, he added.

“A couple of years earlier, we saw the rise of 20/80 payment plans with the 80 per cent expected to be paid over a 3-5 year post-handover period. However, there are still some outliers offering extended post-handover payment periods like Pantheon Elysee in JVC and select DAMAC projects are offering 10-year post-handover payment plans,” Jochinke said.

Takeaway #7: For mortgage buying, you must look into the entry, running and closing cost of the product offered by the banks

Banks in UAE offer multiple variants for mortgage products, which are customised by clients need. Gupta said most banks provide the initial fixed-rate that varies among banks ranging from 1 year to 10 years.

Homebuyers should also consider the mortgage product’s entry cost, which would include initial pre-approval fee, property valuation fee, and mortgage arrangement fee, apart from land department charges based in the respective emirates in UAE.

He added, “Many banks offer 3 to 5 years fixed rate products after that linked with EIBOR clubbed with bank margins. The current rates offering starts from 2.21 per cent fixed for 2 years, 2.69 per cent for 3 years, 2.75 per cent for 5 years, and 10 years it is 3.49 per cent. Banks also provide options of variable/floating rates from the beginning of the mortgage cycle starting from 1.79 per cent linked with EIBOR.”

What is EIBOR?

EIBOR is an abbreviation of the ‘Emirates Interbank Offered Rate’ (EIBOR), is a daily reference rate, published by the Central Bank of the UAE, based on the averaged interest rates at which UAE banks offer to lend funds to other banks in the United Arab Emirates Dirham wholesale money market.

EIBOR forms the basis of most lending rates in the UAE – personal loans, car loans and most importantly, home loans. The three-month EIBOR stands for the interest rate at which a panel of selected banks borrow funds from one another with a maturity of three months.

“Consider the entry and running cost to calculate the projected expenses and monthly commitments of instalments towards loan repayment. And, if you have enough savings to manage the cost and down payment of a minimum of 20 per cent, the mortgage option should be better a proposition considering a long-term investment plan,” he said.

Some examples and related calculations for mortgages and payment plans – What is assumed?

Assumptions used for Mortgage:

• Dh2 million purchase price
• 20 per cent down payment
• 25 year term
• 3 year fixed rate period @ 2.75 per cent fixed rate

Assumptions used for Payment Plan:

• SPA signed 18 months before handover
• 10 per cent paid at SPA / booking
• Depending on which payment plan 50/50, 60/40, 70/30 the 30 per cent, 40 per cent, or 50 per cent has been broken down evenly over the 17 months between first payment and handover i.e. the 60/40 plan would have 10 per cent on SPA, 10 per cent on hand over, and 40 per cent paid evenly during the 17 months between, then the last 40 per cent left for the post-handover payment plan
• 10 per cent paid at handover
• 3 year post-handover payment plan
• Depending on payment plan the 50 per cent, 40 per cent, or 30 per cent has been broken down evenly over the 36 months following handover.
• Each developer’s payment plan is different, both during construction and post-handover – some have monthly payments, some quarterly. For the sake of the example, these have all just been calculated monthly.

Tables
This is based on PMT function taking interest rate divided by 12, total loan tenure multiplied by 12, minus principal amount. (PMT is a built-in function in MS Excel that saves time and long handwritten math, it calculates loan payments and it’s the same formula behind the scenes of pretty much any online mortgage calculator.)

Tables
1. Dh42,000 (Top row): most likely applicable only on non-developer sales – for comparision this might want to be omitted; 2. Dh40,580 (Second row): 2 per cent paid by buyer; 3. Dh4,200 (Third row): Payment Plan developer charges a similar fee as Trustee

Tables
1. Dh244,780 (Top row): 10 per cent of Dh2 million on booking Dh200,000 plus transaction cost of Dh44,780; 2. Dh58,824 (Second row) – 30%, 40%, or 50% of Dh2 million has been broken down evenly over the 17 months between first payment and handover 3. Dh200,000 (Third row) – 10 percent on handover 4. Dh16,667 (Fourth row): Remaining 50%, 40%, 30% of Dh2 million paid off in installments over 36 months

Tables
1. Dh538,898 (Top row): The first part of the formula is the 10% paid at SPA, and assumes this is paid 18 months pre-handover. The remaining payments are for the 30% during construction and are paid in equal installments over a further 17 months. As this row is for year -1.5, which is 1/2 a year, only 5/17 of the installments are in this row. This also assumes that when the 10% is paid with the SPA that there is 1 month until the next installment is due. 2. Dh705,882 (Second row) – This row is for year -1 which is a full 12 month period so out of 12/17 payments are made during this period. 3. Dh200,000 (Third row): 10% at hand over, making it 50% paid pre-handover. 10% + 30% + 10%. 4. Dh200,000 (Fourth row): Remaining 50% paid off in installments over 36 months and covered in rows 37-39; 5. Dh827,330 (Bottom row): After the fixed term the reversion rate kicks in or the borrow could refinance



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