Mortgage Terminology – Basic Knowledge

It is no secret that the Mortgage industry has a lingo of its own, which may seem like a strange or incomprehensible language for those who are going through their first mortgage experience. While there is a large pool of technical terms used within the industry, below are the essential key ones to know.

• Loan to Value (LTV)

This represents the ratio of the mortgage amount as a percentage of the value of the real estate asset. The maximum LTV is determined by the UAE Central Bank. It is capped at 85% for UAE Nationals and 80% for Expatriates for first-time home buyers and is applicable to purchase and balance transfer transactions as well as final handover payment to Developers. The maximum LTV allowed for off-plan properties is 50%.

Illustration A

Assume a property assessed for a value of AED 1 Mio and the loan amount granted is AED 600K, then LTV is 60%.

Illustration B

Assume you are an Expat looking to buy your first property valued at AED 1 Mio and that you would like to avail the maximum financing allowed. The mortgage lender/bank can consider financing a maximum of 80% subject to you fulfilling all other underwriting criteria.

In different terms, the bank will look at financing you a maximum amount of AED 800K and you will need to pay from your own sources the difference amount being AED 200K. This portion is the Down Payment that you pay upfront and that is not part of the home loan.

• Debt Burden Ratio (DBR)

This is a term commonly used by banks to determine the affordability of loans to potential clients.  It is the ratio of debt burden to income. The maximum DBR for Mortgages is set at 50% by the Central Bank.  This means that you may not borrow money where the total monthly combined repayments exceed 50% of your total monthly income.

• DBR Illustration:

Assume that your income is assessed by the mortgage lender/ bank at AED 30K per month. And assuming that you are paying a car loan monthly installment of AED 2K and you are requesting for a mortgage loan with an equivalent monthly installment of AED 7K, then in this case your DBR is (2,000+7,000)/30,000= 30%

• Annual Percentage Rate (APR)

This represents the interest rate for a year (annualized) as applied on the mortgage loan.

Banks in UAE usually determine the APR for mortgages either as Profit Rate (for Islamic Financing) or Interest Rate (for Conventional Lending). The interest or profit is calculated on a reducing balance and on a daily basis.

• Early Settlement

Early settling a mortgage is nothing but repaying your home loan ahead of schedule. This could be in the form of an extra payment which will reduce the amount of mortgage principal or full repayment of the loan.

Depending on the mortgage agreement with your lender/bank, there may be a prepayment cost for pre-paying.  In the context of UAE, the maximum fee a Bank can charge is regulated by the U.A.E Central Bank and is defined as 1% of the outstanding loan amount capped at AED 10K.

• Pre-Approval

A pre-approval is simply the evaluation of a potential borrower by a lender/bank that determines: (a) whether the borrower qualifies for a loan and (b) the maximum amount that the lender would be willing to give.

The pre-approval process is a formal process that involves a thorough look into the income and expenses of the borrower, including a look at the credit report and score. There is no assessment of the property in a pre-approval.

In the context of UAE, a pre-approval requires a deep dive into the personal finances of the mortgage applicant and covers a thorough verification of income, assessment of income and DBR, and Credit Bureau check. A pre-approval issued by the bank would normally be valid for a limited period of time up to 90 days based on the bank’s internal policy.

In a nutshell, understanding the mortgage technical lingo used within the industry and the overall process may seem like a challenging task leaving you feeling dazed and confused. At Lion Mortgage Consultants, we take your stress away, explaining every aspect of the mortgage and addressing all your concerns. Our team of professional mortgage advisors is here to help you navigate the complexity of the mortgage process and leave you feeling confident about all aspects of the process.