Common mistakes to avoid for UAE’s first-time home buyers

Do not overstretch financially, apply for mortgage pre-approval, factor in additional costs and consider impact of interest rate fluctuations

Homeowners should ensure that their mortgage payment does not exceed 25 per cent to 30 per cent of their net income. Getty Images

There has been a surge in buyers getting on the property ladder in the UAE.

Dubai recorded a 43 per cent increase in mortgage registrations last year compared to 2022, according to a report by real estate agency Provident Estate.

For many in the UAE, the first steps on the property ladder pose unique challenges that require planning and sound financial understanding.

Below are some of the key things to watch out for to help you avoid common pitfalls and make informed decisions when it comes to securing finance for your first home purchase.

Understand your financing options

The UAE offers a range of financing solutions, but the right choice depends on your financial situation, long-term objectives, and the type of property you’re interested in.

Two primary finance options dominate the market: conventional mortgages and Islamic financing.

First-time buyers often turn to conventional mortgages offered by local and international banks.

These typically require a down payment of at least 20 per cent for foreigners and 15 per cent for UAE nationals, with the mortgage covering the remaining property value. The loan is repaid over a set period, often up to 25 years, at either a variable or fixed interest rate.

Compare offers from multiple lenders, considering not just the interest rate but also additional charges such as processing fees and early settlement penalties.

Pay attention to how fluctuations in interest rates could affect your repayments over time.

Islamic mortgages, such as murabaha or ijara, offer a Sharia-compliant option. Instead of charging interest, the bank buys the property and sells it to you at a profit, with the repayment structured over time.

While this is a viable alternative for buyers seeking to align with Islamic principles, the overall cost can sometimes be higher than conventional loans.

Review the bank’s profit margin and the repayment schedule in detail to fully understand the financial implications over time.

Pitfalls to avoid

Although securing financing might seem straightforward, first-time home buyers in the UAE tend to commit several common mistakes.

One such mistake is overstretching financially to afford a more expensive property. Banks may approve loans based on your current income, but this doesn't account for potential changes like job instability or interest rate fluctuations.

Ensure your mortgage payments don't exceed 25 per cent to 30 per cent of your net income, leaving room for unexpected expenses such as maintenance and service charges.

Starting the home search without securing mortgage pre-approval can lead to missed opportunities or delays, especially if you’re not financially ready to proceed when you find the right property.

Obtain pre-approval before beginning your property search to clarify your borrowing capacity and strengthen your negotiating position.

First-time buyers often overlook additional costs such as property registration fees (4 per cent of the property’s value in Dubai), agent fees (around 2 per cent), and ongoing expenses such as maintenance and utilities.

Set aside 10 per cent to 15 per cent of the property’s price for these additional costs to avoid surprises.

The UAE dirham is pegged to the US dollar, meaning mortgage rates are influenced by changes in US Federal Reserve rates.

Consider a fixed-rate mortgage for the first few years to protect yourself from volatility in interest rates. Although fixed rates may be slightly higher initially, they offer more predictability in a fluctuating market.

First-time buyers should generally work with a reputable mortgage adviser to guard against costly mistakes, or even scams.

Working with an experienced real estate development team who understands the market means you can take advantage of decades of industry experience to ensure a better outcome based on your objectives.

For foreigners, property investments worth more than Dh750,000 ($204,220) may qualify for a three-year residency visa, but it’s crucial to ensure the property meets all visa eligibility requirements.

Buyers should always confirm the current residency eligibility with their developer or real estate agent before making a purchase.

Thomas Wan is managing partner at Refine, a real estate development company