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Complete Guide to Buy-To-Let Mortgages in Dubai and the UAE

Updated: Feb 9, 2023

Buy-to-let mortgages allow you to buy a property, mortgage it with a small downpayment, and rent it out. In theory, rental income from the property can then be used to pay for your interest and principal payments.


Buy-to-let mortgages are readily available in countries with highly developed financial systems like the United States and the United Kingdom. In those countries, the value of the property itself and the discounted value of the projected rental income are usually enough to secure the mortgage with your lending provider. In other words, the bank won't demand the property investor to show income from other sources (e.g., a salary income from employment) to secure the mortgage.


In Dubai and the UAE, securing a mortgage for a property you want to rent out is not as easy. The qualification process is much stricter, and interest rates are significantly higher, especially if you are a non-UAE citizen.


Mortgage lending in the UAE is more restrictive due to the country's short history and population makeup.


About 90% of the UAE's population is foreign-born and does not have UAE citizenship. Foreigners need to regularly renew their visas and have no option to attain permanent residency status. As a result, the majority of the population is transient and retains roots in other countries. For banks, it is significantly riskier to lend to transient investors than it is to lend to citizens of a country with a permanent presence.


The UAE was founded on December 2, 1971, and just recently celebrated its 50th anniversary. Dubai started allowing foreigners to buy property in 2001 on a 99-year leasehold basis, allowing full outright ownership from May 2002. Since then, there was little time to develop a competitive mortgage lending industry.


Now that we understand the reasons for the UAE's restrictive mortgage market, let's look at the options out there for foreigners to get a buy-to-let mortgage on Dubai property.




DIFC financial district in Dubai
Shown here is DIFC - Dubai's financial district



Income requirements for a Dubai buy-to-let mortgage


Foreigners, whether they reside in the UAE or outside, need to show sufficient external income in order to qualify for a buy-to-let mortgage. The expected rental income of the investment property will not suffice!


Furthermore, banks require you to be employed in your current position for at least 6 months, and often more.


If you are self-employed or run your own business, you need to show evidence of continued income over the last 2 years plus.


Income from these sources should be enough to cover your current living expenses plus the mortgage expenses of your investment property to ensure you are able to cover all costs in case your property is not rented out.


Contrary to other property markets, the Dubai real estate market is significantly more volatile. Black swan events like the 2008 financial crisis and the 2020 Covid pandemic led to the outflow of hundreds of thousands of residents. Many apartment owners struggled to rent out their properties over longer periods of time and were forced to accept steep discounts on the rents they charged.


UAE banks know this and accordingly require you to show income that would allow you to cover all property-related costs and mortgage expenses for 1-2 years in case you cannot find a tenant.


Even with proof of income, your bank may be reluctant to lend to you if your employer is small and unstable, or your business operates in a seasonal or unstable industry.


If you do not reside in Dubai, UAE banks will be more skeptical, but may still be willing to lend to you if your external income is relatively high, you own other assets, or you can show steady, long-term income streams.


Some banks operating in Dubai have operations in multiple countries, like HSBC. If you have an existing banking relationship with such a bank outside the UAE, you may benefit from favorable lending terms.



Credit history requirements for a Dubai buy-to-let mortgage


Just like in the US or UK, you will need to have an adequate credit history to qualify for a UAE mortgage.


If you are an international investor, you may show your credit history from your home country.


If you are based in the UAE, you should have built a local credit history. This can be achieved by using a credit card and paying your credit card bills on time. 2+ years of credit history are usually the minimum requirement.


However, keep in mind that every bank has slightly different conditions, and there are many other factors at play, such as your overall debt history, e.g., with consumer and car loans, and the size of your debt payments.



Age requirements for Dubai buy-to-let mortgages


Up until October 2019, there were very strict guidelines set by the UAE central bank on age restrictions for mortgages. These have been changed, however, the majority of banks continue to restrict mortgages by age based on these old guidelines. Exceptions are rarely made, and only on a case-by-case basis.


Specifically, mortgage installments may only be paid between the mortgage owners' ages of 21 and 65. This means that the last installment of your mortgage has to be paid before you turn 65.


If you are self-employed or are a UAE national, the maximum age for your last mortgage payment increases to 70 years.



Down payment requirements


Just like for regular home mortgages, foreigners may pay down as little as 20% on a property in the UAE. This is equivalent to a loan-to-value (LTV) ratio of 80%.


UAE nationals enjoy preferential conditions and may pay down as little as 15%.


Keep in mind that the exact conditions provided by your bank may depend on the quality of your external income.



Interest rates and costs of buy-to-let mortgages in Dubai


Compared to a standard home mortgage on a property you live in, the expenses and interest rate charged on a buy-to-let mortgage in Dubai are significantly higher.


Before the recent rise in interest rates, 5-year fixed interest rate mortgages hovered around an interest rate of 4%.


In 2023, with rising global interest rates, expect to pay at least 5% in interest, and likely more.


Taking into account other expenses related to the property investment, like the 0.25% mortgage registration fee, and your property acquisition costs, you may just be able to pay the interest with your rental income.


Properties in Dubai, on average, pay a 5% net return after the deduction of building service charges and accounting for periodic vacancies and other expenses.


This rental return will pay your mortgage interest expense, but not help you pay for the amalgamation of your loan amount. In other words, you will still have to put in money from your external income to pay off the mortgage.


Is there any benefit to taking out a buy-to-let mortgage in Dubai?


Given the high cost of Dubai buy-to-let mortgages, you may wonder whether it is worth it at all.


To be frank, there is just one major benefit of using such mortgages to invest in Dubai, and that is the ability to leverage capital appreciation.


If the property increases in value, you may sell it after 5, 10, or 15 years. You did not gain any rental income in that period, as the rent paid for your interest. However, you are able to leverage the capital appreciation return on your original downpayment.


Let's say you bought the property for AED1mill and paid down 25%. Rental income paid for the interest over a 10-year period.


You paid off the AED750K loan with your external income over this time period.


The property is now valued at AED1.5mill. You earned a capital return of 50% over 10 years.


Taking into account that you paid AED750K in installments over 10 years rather than all upfront, your actual total return may be closer to 70% due to the time value of money.


Annualized, this is equivalent to around 5.5%. In other words, your net return is 5.5% per year.


Learn the logic behind these calculations and how to perform them yourself in a few minutes with our Cash Flow Coaching.



If you have just AED250K to start investing and want to buy a higher-priced property, going for an expensive buy-to-let mortgage may therefore still be a lucrative option.


Please keep in mind that this strategy still involves significant risks, and its success depends greatly on you selecting the right property to invest in. We specialize in helping analyze properties for investors using advanced cash flow analysis methods. We do not sell properties and are 100% independent. We cover all aspects of the Dubai property market. Check out our services:





Conclusion


While Dubai buy-to-let mortgages are not the most attractive financial instruments out there, they do have a use for some investors who have limited upfront capital, but sustainable external income.


There are many other ways of investing in Dubai property. Check out our free articles in our know-how hub, or contact us for a free consultation.





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