Essential Mortgage Terminologies for Homebuyers
It is an accounting principle utilized to lower the value of a loan or asset periodically over a stipulated time frame.
It is a list of all monthly repayments for a mortgage loan. Usually, the amortization schedule is presented in a table format and for clarity may be divided into principal and interest components of repayments.
A mortgage of a property is transferred from one bank to another bank for better terms and conditions. Learn more about refinance at https://fcmb.ae/mortgages/refinance
The bank charges a penalty fee if a borrower settles the complete mortgage loan earlier than the stipulated tenor in the mortgage contract. This penalty is designed to minimize lost interest revenue due to early settlement for the bank on the mortgage loan. Central Bank of UAE regulations caps the fee at 1% of the amount repaid early with a maximum of AED10000. In case of an early settlement due to the sale of the property, some banks may exempt the borrower from early settlement fees, check with your bank or broker to see if you qualify.
A transfer of a mortgage to a different bank for better terms and conditions, with the addition of loaning out additional cash for property improvements or any investment purpose.
These are costs associated when a title of a property is transferred from a seller to the buyer, in the UAE closing costs usually include a land department fee, property registration fee, real estate agency fee, property valuation fee, and mortgage registration fee. Closing costs can total up to 5-7% of the property value.
The property upon which the residential mortgage loan is secured
All tasks and processes related to the collateral when granting a mortgage loan. E.g. appraisal and constitution of collateral, confirmation of its legal existence, and enforceability.
These are mortgage deals based on interest rates. A bank lends a borrower money to purchase a property. The bank will charge an agreed-upon interest rate as profit. The bank will charge an equated monthly installment for the principle and interest.
This is related to the due diligence process of the mortgage provider (bank). It is completed by an employee of the bank during the underwriting of a mortgage deal. CPV includes but is not limited to verifying the mortgage applicant's identity and employment. The bank may use email, telephone, or site visits for CPV. It is common for banks to request client information directly from an employer's HR department.
Borrower fails to make a monthly payment to the lender.
A desktop valuation provides a quick and cost-effective estimate of a property's value using online data, without the need for an on-site visit by a third-party surveyor. Typically costing between 1,000 and 1,600 AED, this method offers convenience but may miss unique property features, making it less precise than a full appraisal
This is a letter issued by a developer of a property. A buyer has to apply and pay for a NOC from the developer to transfer the ownership of the property. The NOC confirms all dues related to the property being purchased have been paid and the developer has no objection to the sale of the property.
Is when the bank draws up a check for the loan amount, usually the check will be in the favor of the property developer or the borrower
Dubai Land Department. This body was founded in 1960 to safeguard property rights in Dubai. The DLD provides a variety of services, which includes but is not limited to legalizations, registration, and promotion of sale and purchase of land in Dubai.
Up-front payment from the buyer for a portion of the purchase price of the property. The down payment reduces the LTV/FTV of the loan against the property. The down payment can not be funded through means of a loan or credit line, it can only be funded through the borrower's assets only.
This is the action of borrowing funds under a loan agreement on a specific day.
This is used in commercial properties, it is the ratio between net annual rental incomes to the sum of annual mortgage payments.
DSCR = Annual net rental income / annual mortgage debt service value. In the UAE DSCR has to be less than 1.5. This is also represented as a percentage by some banks as 150%.
It is the portion of fixed monthly income used to pay monthly debt premiums (mortgage repayment, credit card payments, auto loan payments, etc.).
DSR = Total repayments for debt obligations / Monthly fixed Income.
UAE Central Bank regulations have mandated this ratio to be less than 50%.
It is 5% of the rental contract's value for all premises.
To limit and mitigate the risk arising from mortgage loans business, mortgage loan providers have in place a clear written program of due diligence (legal and other) to be followed during all stages of the application process to ensure lending policies are being implemented correctly. Procedures are also in place to ensure that, before drawdown, all conditions attaching to the loan have been (or are being) complied with.
Emirates Interbank Offered Rate. This is an average of interest rates banks in the UAE lend to each other. The EIBOR is the benchmark used by many financial institutions in the UAE to set rates for retail loan products.
Equated Monthly Installment is the monthly fixed repayment made by a borrower to the lender each calendar month.
It is the difference between the appraised value of a collateral property and total claims held against the property. In most cases, the claim on the property is the total value of the loan still to be settled.
It is a loan taken against the value accumulated in a property you own. If the property is fully owned without a lien market value is a fair estimate of the value accumulated. In the UAE equity releases can be used for property improvements or real-estate investments. Find more about refinancing.
The bank charges a penalty fee if a borrower settles the complete mortgage loan earlier than the stipulated tenor in the mortgage contract. This penalty is designed to minimize lost interest revenue due to early settlement for the bank on the mortgage loan. Central Bank of UAE regulations caps the fee at 1% of the amount replayed early with a maximum of AED10,000.
This is the process of estimating the value of a property, valuation may not always match up with the sale price of a property. All mortgages depend on the value of the property being purchased, in almost all mortgage cases the bank is required to verify the value of the property. This valuation process has to be conducted by an unbiased professional 3rd party surveyor. The mortgage applicant needs to pay the cost of the surveyor. Banks have a list of empaneled independent valuation agencies that undertake property valuations. Usually, the valuation will cost around 1900-3500AED. Some banks from time to time offer waivers for valuations fees as promotions, check with your broker if you qualify.
A fixed-rate mortgage is a loan where a specific interest rate is applied for a portion of the loan tenor. In the UAE it is common to see fixed-rate mortgages where interest rates are fixed for 1-7years. After the fixed-rate tenor of the loan expires a variable rate formula will kick in. E.g. 2.5% fixed for 3 years, thereafter 2.1%+3Month EIBOR
After the evaluation of the property is completed and all pre-approval requirements are met, this document is generated by the bank. The FOL includes all binding terms & conditions presented by the bank to the borrower in order to complete the mortgage loan. Subject to fulfilling all conditions set by the bank and the borrower signs the FOL and associated mortgage contracts the case proceeds to disbursement of funds.
RERA Form A in Dubai is a formal agreement between property sellers and real estate brokers, granting the broker the authority to market the property under specific, mutually agreed-upon terms. This contract is essential for ensuring clarity and transparency in the sale process.
Key features of RERA Form A include but are not limited to:
- Authorization: Grants broker the legal right to market and promote the property on the seller’s behalf.
- Terms and Conditions: The contract covers important aspects such as payment schedules, the property's mortgage status, and any applicable service charges, ensuring both parties are aligned.
- Marketing Guidelines: Specifies the platforms and methods for advertising the property, ensuring a clear and strategic marketing approach.
RERA Form A ensures that both the seller and broker have a clear understanding of their responsibilities, making the property marketing process transparent and straightforward.
RERA Form B in Dubai is a key agreement that establishes the relationship between a property buyer and a real estate broker. By signing this form, the buyer authorizes the broker to represent them in finding and negotiating the purchase of a property.
Key components of RERA Form B include but are not limited to:
- Buyer Representation: The form officially appoints the broker to act on the buyer's behalf in the property search and negotiation process.
- Define Terms: Outlines the buyer’s specific requirements, budget, and payment terms, ensuring that both the buyer and broker have a clear understanding of the objectives.
- Broker fees: Specifies the commission or fees that the buyer agrees to pay the broker for their professional services.
RERA Form B ensures transparency and clarity in the relationship between the buyer and the broker, providing a structured approach to finding the right property.
RERA Form F, or the Unified Sell Contract(F), is crucial in Dubai's real estate transactions. It serves as a Memorandum of Understanding (MOU) between the buyer and the seller, outlining the agreed-upon terms and conditions for selling a property.
Key components of RERA Form F include but are not limited to:
- Property Details: Specifics about the sold property, including location, size, and other relevant features.
- Terms and Conditions: The obligations and responsibilities of both parties, such as payment terms, timelines, conditions for transfer of ownership, and any contingencies.
- Agreed Price: The final sale price of the property, agreed upon by both the buyer and the seller.
- Commission details: Specifics on the commission fees for the real estate agents involved, detailing how these fees will be split between the buyer's and seller's agents.
Form F is legally enforceable, ensuring transparency and protecting the interests of all parties involved in the transaction.
This is the term used in Islamic banking, similar to LTV. It is the value of the finance amount requested by a home buyer from the bank as a percentage of property value. FTV = (Finance requested by the prospective home buyer from the bank / Property Value)*100. In mortgage and banking industries, FTV and LTV are used interchangeably.
Islamic mortgages are not interest-based. It is based on the concept derived from Islamic principles of interest-free lending, where, the bank buys a property on behalf of the client and sells the property back to the client for a profit. Monthly installments payments are made by the client to buy the collateral property from the bank.
The Landlord Segment allows property owners to borrow finance based on repayment from their rental income and property as collateral providing a flexible solution for property renovations, expansions, or new purchases. The loan amount is based on the rental income the property generates, offering a way to leverage this income for additional property purchase or renovation.
Lenders right to keep possession of a property owned by a borrower until all borrowed funds and accrued interest is paid by the borrower
Life insurance is compulsory to obtain a mortgage in the UAE. If a borrower passes away or is permanently disabled the life insurance will kick in to pay off the outstanding mortgage balance.
It is the value of the loan as a percentage of the value of the property.
LTV =( Loan Value/Property Value)*100
In mortgage and banking industries, FTV and LTV are used interchangeably.
It is a legally binding contract between a borrower and a lender to buy, construct or renovate a building/property. A mortgage loan results when an individual doesn’t have all funds upfront to buy a property. The borrower will request funds from a lender to purchase the property. Until the borrowed funds and accrued interest is paid in full the lender will have a lien on the collateral property.
Banks and other financial institutions that provide mortgage loans.
It is the pre-title deed or initial contract of sale between a developer and buyer for off-plan properties. The DLD has mandated all developers register all off-plan properties in the Oqood online portal.
After checking the creditworthiness and ability to pay off a mortgage loan the bank issues this document. It indicates a strong likeliness of the bank to approve the applicant’s mortgage application. Pre-approvals can be obtained without any processing fees and are generally valid for 30-90days.
The pre-approval will clearly state the remaining requirements to be fulfilled to issue the Final Offer Letter (FOL). Once a pre-approval letter is expired the applicant will need to submit updated documents to revalidate the pre-approval, furthermore, there may be associated revalidation fees.
Pre-approval is a valuable tool to plan your home purchase, some sellers may require a pre-approval to sign an MOU if the buyer is seeking financing to buy a property.
Pre-qualification is derived from basic financial information collected from a prospective mortgage applicant. Most of the time it is an estimate of how much an applicant can borrow. Pre-qualifications are only an estimation and should not be mistaken for Pre-approvals because a pre-qualification is not in any form confirmation or guarantee of being able to borrow funds. A prequalification calculation can be obtained from a bank or broker.
It is a property insurance policy that covers losses or damages to a residence. It is also known as fire insurance in Islamic banking.
Exchanging your existing mortgage for a new mortgage. It can be in the form of a buyout, an equity release, or a combination of a buyout and equity release.
This is an external 3rd party office sanctioned by the DLD to process DLD related tasks. At a trustee's office, you are able to register
transfers, sales, mortgages, grants, development, or pre-registration of properties.
Regulates real estate activity in UAE. RERA was established in 2017 and has administrative independence. RERA sets policies and takes action to improve foreign investment in the Dubai property sector. Furthermore, the RERA is responsible to settle disputes between tenants and landlords.
The option of including associated fees in the principal amount borrowed. The associated fees include DLD title transfer fee (4% of property purchase price + admin fees up to AED 580), Real estate agent commission (2%+VAT), DLD mortgage registration fees (0.25% of loan amount + AED290)
The stress test is designed to ascertain the ability of a borrower to repay a loan, also to protect borrowers from overburdening themselves with too much debt, and minimize risk in case interest rates rise in the future. The rate is usually 2-4% more than the market rate (This adjusted rate is referred to as the stress rate).
This is the rate used in the stress test conducted by the bank. This is usually 2-4% more than the market rate. The stress test is designed to ascertain
a) The ability of the borrower to repay the loan
b) Protect borrowers from overburdening themselves with too much debt
c) Minimize risk in case interest rates rise in the future.
The maximum tenor in the UAE is 25 years, and the minimum tenor is 3 years. Furthermore, the tenor is capped at 65 years of age for a salaried applicant and 70 years for a self-employed individual or a maximum 25-year tenor, whichever comes first. E.g. 55-year-old salaried person can get a maximum tenor of 10 years.
A variable-rate mortgage is a loan where the interest rate of the loan is variable from the start. The value of the variable rate is determined by referencing a benchmark rate. In the UAE, EIBOR is used as a benchmark to determine the variable rate. E.g. Variable rate = 3Month EIBOR rate + 2% mark up. I.e. if the 3Month EIBOR rate is 0.4% then the variable rate will be 2.4%. Usually, the variable rate is determined by referencing the benchmark rate on the day the repayment is calculated.
