Even if it’s not something you are looking to do in the immediate future, buying a house still probably tops your long-term financial agenda. The biggest challenge here is funding the down payment from your personal savings. Souqalmal.com rounds up ways to easily and systematically save for this purchase of a lifetime.
When buying a house, more important than shortlisting mortgage lenders and calculating monthly installments is putting together the substantial cash sum or the down payment that needs to be paid up front before finalising the deal.
Loan to Value in the UAE
The Central Bank of the UAE tightened the maximum Loan to Value (LTV) in 2013 introducing mortgage caps. This translates to expats settling 25 percent down payment on the first purchased property below AED 5 million and 35 percent for a property over AED 5 million. The down payment rises to 40 percent for subsequent property purchases. UAE nationals, however, are required to settle a down payment of 20 percent for their first property under AED 5 million and 30 percent for a property above AED 5 million. For subsequent property purchases, the down payment increases to 35 percent. For off plan properties, the maximum mortgage credit value is 50 percent and this applies to resident expats as well as UAE nationals.
Blueprint for a successful down payment savings plan.
1. The first step is to familiarize yourself with the real estate market in the region. Combined with the LTV you are eligible to acquire, this should give you an idea of how much you need to save for the down payment.
2. The next step is to set a realistic timeframe to achieve your target. Then split it into more achievable monthly or annual goals.
3. The final step is to develop a sound strategy and fiscal discipline to build some serious savings.
Building Your Savings
Here are some strategies that can prepare you :
Budget – Budgeting is the foundation of the savings process. It simply refers to a spending plan that balances your income with your expenses. Documenting your spends is the best way to get a handle on your finances. It is about understanding how much money you have, where it goes and how much of it can be saved. Once you have the summary laid out in front you, it will be easier to identify and cut back on wasteful and unnecessary expenditures to maximize your savings.
1. Pay off those debts – Paying off credit card debts and other loans at the earliest is important for two major reasons. First, credit cards issued in the UAE come at a staggering 40 percent APR on average. For individuals settling the minimum 5 percent every month, debt can accumulate at a rapid pace. As such, it makes perfect sense to quickly pay off these expensive debts. Secondly, settling debts can free up more cash from your paycheck which can then be saved towards the down payment. It should also be noted that high credit limits and excessive loans would negatively affect your DBR (Debt Burden Ratio), which in turn will impact your eligibility for a mortgage approval.
2. Bank your windfalls – A sudden windfall profit like inheritance money, gift, bonus, lottery winnings or legal settlements can play a massive role in getting you closer to your goal. It can drastically accelerate your savings process by trimming off a few years from your estimated timeframe.
3. Boost your income – You can also fast track those savings with a boost in your income. Take up something in your spare time, consider starting a side business, work towards a raise or a promotion, do overtime, get freelance work or a second job.
4. Banking aids – Banks too offer some remarkable ways to save without having to make any extra effort. You can open a dedicated online savings account for your down payment. This makes it easier to track your progress. Moreover, you can activate an automated savings plan on these accounts.