Are you familiar with the mortgage options available?
At Standard Chartered, we’re committed to providing you with the right financial tips and tools. Through this edition of our “Basics of Banking” series, we shall share the many ways in which mortgages can work.
What is a Mortgage?
A mortgage is a financing facility that enables the purchase of a property for residential, investment or commercial purposes. You pay an Equal Monthly Instalment (EMI) towards this facility to pay off the principal and a rate of interest/profit towards the original amount borrowed. The facility is secured by the financial institution against the property purchased.
Types of Mortgages
Variable Rate Loans
A Variable Rate loan means the pricing for the loan is based on a variable component and a fixed margin. The variable component is typically the country’s base lending rate, which is set by EIBOR (Emirates Interbank offered Rate) in the UAE. This ranges from 1, 3, 6, 9, 12 months + the margin to arrive at your rate. The base rate can continue to change over the course of the tenure selected, however the margin typically remains constant. These rates are agreed by you at the time of onboarding.
Fixed Rate Loans
A Fixed Rate loan means the pricing for the loan is fixed for a specific tenure during the product lifecycle e.g., 1, 3, 5 years fixed rate. This will also consist of EIBOR + margin at the time of onboarding. Post the completion of the fixed rate tenor clients will have the option to opt for another fixed rate term or move to variable rate options. This is subject to various offers made by the financial institution.
Interest Only Loans
Interest Only loans work almost in the same way as regular mortgage loans, however you only pay the interest for the period the loan is booked, the principal amount remains outstanding.
Life of a Mortgage Loan
Mortgage loans are generally spread over 25 years. However individual financial institution may have different criteria as applicable, in line with their regulations, whereby the term may be reduced.
Applicable fees on a Mortgage Loan
There may be various mortgage related fees that your bank might charge. Below is a list:
• Application Processing Fees
• Late Payment Fees
• Interest/ Profit Rate applicable on the facility
• Balance Transfer Fees for moving facility to another institution
• Municipality/ Land Department Fees taken on behalf of these institutions
• Early Settlement Fees
• Repricing Fees
• Insurance Fees
• Property Evaluation Fees
Implications of not paying EMIs
If the full due balance is not cleared by the due date, you will be liable to pay late payment fees. Missed payment details will be reported to the Credit Bureau and potentially could lead to foreclosure process by the financial institution if the payments continues to be in arrears.
Identify the type of mortgage that suits you best, based on your financial prowess and repayment abilities. Check with different banks and other financial institutions to find the option that’s aligned with your requirements.
To know more or read related topics, visit https://www.sc.com/ae/stories/basics-of-banking
