Banks in Dubai dont offer fixed intetest rates on Mortgages

2 Replies

I live in Abu Dhabi, United Arab Emirates (UAE). I purchased 2 off-plan studio apartments in a span of 6 years, without taking a bank loan. I paid cash in full from my saving (proprieties are worth about 300k$ now).

My goal once construction is completed (expected by 2020) is to rent them out and start earning passive cash flow.

I would like to purchase another house soon but can’t use the same strategy anymore, which is putting all money in, as I no longer have enough cash. However, I do have the 20% down payment shall I decide to take a loan from a bank.

I am hesitant to take a loan from our local banks. Banks in UAE don’t offer fixed interest rates on mortgages, but for a maximum of 5 years only (interest rate is currently at 4%). After 5 years, the interest rate will change depending on the local central bank, it might go up to 6-7% or low to 2-3%, or might remain the same (god knows).

So if I decide to have a payment plan for 20 years, how shall I calculate my numbers and do my math? In terms of what kind of risks I should factor etc

When I made my calculation, if interest rate is at 4% (first 5 years), I would be getting 400$ of passive cash flow (after cutting expenses). However, once the 5 years are over, if the interest rate raise to 7% (worst case scenario) I would end up getting 90$ monthly.

I know the property will appreciate by time, but my aim is not to sell, but earn a monthly income (which I can save an reinvest again). But to be honest I just feel the 90$ wouldn’t be worth the hassle and I should just drop the idea..

Please share your advises

I lived in Abu Dhabi for a year, back when the skyline was dominated by construction cranes. :)

Assuming the ARM's margin is tied to a reasonable index, it "should" go both up and down proportional to rents doing the exact same thing. If I were in your shoes, I'd look into exactly that. I said "should" because for all I know they're offering you something tied to LIBOR, and there's not an obvious reason to think that the London Interbank Offer Rate will go up/down with Abu Dhabi rents, but maybe it does, who am I to know. Figure out what the index is, and see how it historically has tracked with rents in Abu Dhabi, if you can't find that exactly look for at least something that tracks UAE rents over time. 

If they ballpark track up and down together, then you should be ballpark automatically protected. If they frequently go opposite directions, or appear completely un-correlated, then you've got a potential problem - you don't want your payment going up at the same time as rents go down!