Guide to Financing Options for Off Plan & Secondary market Property

1- Bank Financing - Mortgages

Bank financing is considered one of the most common methods for funding real estate purchases - this is applicable for both off-plan properties and secondary market purchases. Traditionally, Dubai, and the UAE overall, have been dominantly cash-based Real Estate Markets, but demographic shifts and a decrease in the average age among purchasers has led to a steady increase in the mortgage purchase rate.

Having said that, the purchase mortgage rate in Dubai is considerably lower when compared to other developed Real Estate Markets; here is a breakdown of the types of mortgages available:

• Fixed-Rate Mortgages: This provides stability since the interest rate is fixed for the whole tenure of the loan, protecting the buyer from any market fluctuation.
• Variable-Rate Mortgages: Interest rate generally fluctuates depending on the economy - while this brings the possibility of a low rate, it also carries the risk of that rate going higher.
• Interest-Only Mortgages: This allows the borrower to only pay interest in the initial period and repay the principal amount later. While this decreases the initial financial burden, it increases the cost in the long run.

Several banks like Emirates, NBD, and Dubai Islamic Bank offer competitive mortgage options for real estate investors.

2- Developer Financing

The majority of developers in Dubai offer in-house financing options. These are primarily organised as flexible payment plans allowing buyers to pay for the property in instalments during the construction period.

• Post-Handover Payment Plans: Developers can allow you to continue paying for the property even after obtaining possession - these plans often extend the payment period by several years.
• Interest-Free Plans: The majority of developers offer interest free payment plans to make it easier for end-users and investors to invest without relying on external financing.

At LYM Real Estate, we work with leading developers who provide flexible financing options in a reliable manner to ease your investment journey in Dubai.

3- Private Lenders

If you’re struggling with getting traditional bank loans, particularly for individuals who might not meet the rigorous banking requirements, private financing offers an alternative. While the interest rates from private lenders tend to be higher, the terms are often more flexible.

• Islamic Finance: The financial sector in Dubai follows Shariah-compliant principles for Islamic financing with options such as Ijara (lease-to-own) and Murabaha (cost-plus financing). Several banking and financial institutions offer these, which are, therefore, widely accepted in the UAE real estate market.
• Cash Purchases: Some investors prefer to buy properties with cash to eliminate interest payments and loan-related fees, guaranteeing a higher return on investment.

However, while this saves the interest costs, it also ties up a significant amount of capital that inhibits alternative investments, thereby raising opportunity costs - a key consideration in measuring the value of any investments and its future returns. For further information, please don't hesitate to contact LYM Real Estate!

1- Developer Payment Plans

Developers in Dubai occasionally offer payment plans spread over the construction period, such as a 50/50 plan: 50% during construction and 50% post-handover.

2- Interest-free Plans:

Most developers attract investors by offering no interest payment plans for a specific period, which serves as a great advantage to the buyer, saving them from bearing the added cost of interest payments.

3- Early Payment Discounts:

Developers can often provide a discount for buyers who can pay the largest amount upfront or clear the total amount in fewer instalments, thereby encouraging quicker payments. In this scenario, LYM Real Estate advises you to look over the opportunity cost of a higher up-front payment - if the additional capital paid can be utilised elsewhere with a return higher than the discount offered by the developers, it is advisable to not make a higher up-front payment.

4- Post-Handover Plans:

In some cases, developers offer a post-handover payment plan, which extends the payment schedule beyond the handover date. This added flexibility can facilitate investors that wish to rent out to finance repayments.

1. Limited Mortgage Options

In some instances, banks are hesitant to finance off-plan properties - even when financing is available, it usually comes with restrictive requirements. Generally, our team has observed that banks are more keen on financing off-plan properties after a certain portion of the construction is completed - the figure revolves around 50-60%.

2. Higher Down Payments

One of the key drawbacks to bank financing in off-plan projects is the requirement of a higher down payment. Generally, in Dubai, the rule is:

• For Residents: A minimum 20% deposit, in addition to mortgage registration fees, 4% DLD fees, and commissions for the broker.
• For Non-Residents: A 50% down payment is required, in addition to mortgage registration fees, a 4% DLD fee, and broker commissions.

3. Construction Delays Risk

Construction delays are a risk, as the buyer may have to seek additional financing or face the challenge of an incomplete project if construction delays go beyond the expected end date. This tends to create uncertainty in the investment timeline.

4. Credibility of the Developer

Banks are particular about the developer they finance a project with, often only financing projects that are built by known, reputable developers. This decreases the number of options available for the investors, especially if they are interested in projects from smaller or less-established developers.

5. Fluctuating Market Values

Value for off-plan properties may change during the construction phase. If the market goes down, banks may lower the loan amount, thereby creating a financing gap for the investor to bear.

6. Loan-to-Value Ratio

Banks usually approve a lower loan-to-value (LTV) ratio for off-plan properties - this means that buyers for off-plan properties have to contribute more equity. This would pose a challenge for investors looking to leverage their investments with minimal cash upfront.

1- Conventional Mortgages:

Conventional mortgages are commonly available for secondary market purchases, with banks offering a competitive LTV ratio usually around 75-80% for expatriates and 85% for UAE nationals.

2- Pre-Approved Mortgages:

Investors can get pre-approved mortgages in order to make the process easier. By doing so, they would know their financial condition beforehand, providing them with an idea of how much they can offer for a property.

3- Fixed vs Variable Interest Rates:

In the case of secondary market properties, the investor can decide between either fixed or variable interest rates. Fixed interest rates offer stability in interest payments (fixed amount), while variable rates may benefit the investors if interest rates decrease leading to lower payments.

4- Refinancing:

Investors are also allowed to refinance their mortgage after owning the property for a period of time, securing better terms that will potentially lower monthly payments if the refinancing is obtained at a lower interest rate.

5- Remortgaging:

Investors who own secondary market properties can choose to refinance their existing mortgages to take advantage of better rates or release equity for other investments.

1- Stringent Mortgage Approval Process

The prospects for mortgage approvals are usually stricter in the case of these properties in the secondary market. Banks usually require detailed documentation and credit checks, thereby slowing down the entire financing process.

2- Loan Tenure Limitations

Banks can restrict the loan tenure on older properties in the secondary market. This may limit the choices for long-term financing and compel buyers to agree to higher monthly payments.

3- Higher Interest Rates 

Properties in the secondary market come with higher interest rates, thus making the investment more expensive in the long run.

4- Property Valuation

Banks tend to value the property differently than the seller in the secondary property market - this leads to the buyer having to cover the difference making this an un-attractive choice.

5- Seller's Mortgage Payoff

In some cases, the seller still has an outstanding mortgage payment on the property. This makes the process of transferring the property more complicated - the investor needs to ensure that any previous mortgage owed by the seller is cleared before proceeding with their own financing.

1- Loan-to-Value Ratio:

The proportion of LTV varies from bank to bank or developer to developer, therefore knowing how much capital you require initially is essential.

2- Interest Rates:

It is imperative to compare fixed and variable interest rates in order to choose the best deal for yourself on the market.

3- Repayment tenure:

Evaluate tenure options to ensure that your monthly payments align with your financial planning.

4- Property Type:

Determine whether your investment goal best fits an off-plan property that has the potential for capital appreciation, or a secondary market property with immediate rental income. Developer or Bank Reputation: Researching credibility of banks and developers is important to avoid any potential risks.