Generally speaking, mortgages are popular.
In the United States, 70% of home buyers rely on a mortgage for their home acquisition.
In other words, just 30% of home purchases are done in cash.
In the UK, and other European countries, the share of cash buyers is similarly low.
Dubai is different. In the UAE, almost 80% of home purchases are done in cash.
Why are mortgages relatively unpopular in the UAE? Keep reading to find out!
The first big reason why mortgages are less popular in the UAE and Dubai compared to other countries is the dominance of the off-plan market.
More than 50% of properties sold in Dubai are off-plan, as we cover in another video here on our YouTube channel.
Most banks will not approve mortgages on off-plan properties, and if they do, will require that at least 50% of payment installments have been made.
Due to these conditions, around 50% of properties sold in Dubai don’t qualify for mortgages from the outset.
The next big reason why mortgages are uncommon is the UAE’s incredibly low homeownership rate.
The homeownership rate is the percentage share of the population that owns their home.
The homeownership rate varies greatly by country. In China, it stands at 90%.
In the European Union, around 70% of people own their home.
In the US and the UK, the rate is around 65%, in Germany around 50%, and in the UAE less than 30%.
Now why does the home-ownership rate matter when it comes to mortgages?
Mortgage interest rates are typically higher for properties that are rented out, sometimes by up to one percentage point.
And higher interest rates discourage investors from getting a mortgage.
This brings us to the next reason why mortgages are less common in the UAE.
As we just established, a large share of real estate in Dubai is rented out to earn a return for investors. And many real estate investors do not actually live in the UAE.
In fact, an incredible 75% of buyers of Dubai real estate are non-residents.
Banks are reluctant to approve mortgages to non-residents, as it is difficult if not impossible to go after owners of properties in case of a market crash.
When property prices decline to a value lower than the mortgage, the property is considered “under-water”, and the owner may decide to stop paying installments.
If the owner resides outside the UAE, banks have little to no recourse and will have to bear the resulting losses.
As a result of these risks to banks, non-residents have difficulties in getting approved for buy-to-let mortgages, especially if they are above a certain age or have a fluctuating income. Banks will also charge higher interest rates in these scenarios.
When interest rates are in the 5-6% range for rental properties owned by non-residents, mortgages become unattractive.
While many real estate agents and developers promise rental returns of 8-10%, realistic net rental returns are commonly in the range of 4-6%, depending on the property.
Here at the Dubai Navigator, we systematically calculate and compare net rental yields for properties across Dubai, taking into account vacancy rates, service charges, property management fees, and rental demand.
And our research is showing that a 6% net rental yield is the best you can achieve over the long term.
With interest rates almost as high as the rental yield, it makes limited financial sense to take out a mortgage.
Another major reason why mortgages are less popular in the UAE is the volatility of property prices.
Unlike many established cities such as London and New York, property prices in Dubai are highly volatile. High price volatility makes mortgages risky, as you leverage any price fluctuations.
Do all of these factors mean that taking out a mortgage is a bad idea in Dubai and the UAE?
Not necessarily. It all depends on your personal and overall market situation.
Mortgages tend to make more sense when:
You invest in ready properties
Live in the UAE
Live in the mortgaged property yourself
Invest in undervalued real estate with capital appreciation potential
One strategy used to find undervalued properties is to analyze the entire market for upcoming handovers and buy when there is an oversupply of newly finished properties in a certain area.
We keep track of hundreds of thousands of properties and analyze which neighborhoods and property types will likely experience oversupply at certain times in the future.
We do not work with any real estate agents and never earn commissions - making our advice the only 100% independent support available for those looking to buy or sell real estate in the UAE.
If you already own real estate in the UAE, we are able to use the same market data to predict appreciation and rental returns for your property and make recommendations on whether to keep or sell - including at what time.
Book a free consultation with us today.