If you’re thinking of buying a property in the UAE and are looking at financing it through a mortgage that charges a variable rate, consider comparing the terms of the rate by bank. This is because some banks may charge you a variable rate from the start of the mortgage while others have a combination of a fixed rate followed by a variable one. Even if the initial fixed rate is the same on two mortgages, the variable rates can be strikingly different making your mortgage potentially a lot more expensive. Take the time to understand the rates you are being quoted before making a decision. Through our compare to save series, we will show you how you can save money by comparing different home loan features, structures and terms.
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[Related: How can you save by comparing home loans?]
Why choose a mortgage with a variable rate in the first place?
Variable rate mortgages can give you more flexibility where the cost of financing your home is concerned. This is because, instead of you paying a constant and usually higher fixed rate throughout the tenor of the loan, a variable rate will change as interest rates move. So if rates dropped, your variable rate mortgage could end up costing less. Equally however, if rates increased, your mortgage cost will rise. Overall, with a fixed rate mortgage, although you have the comfort of knowing exactly how much you will be paying on your loan from the very start, you could find yourself locked in for the long-haul especially as some fixed rate mortgages come with hefty early settlement penalties.
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How do variable rate mortgages differ by bank?
Not all banks have the same structure of variable rate mortgage. Some banks will charge you a variable rate from the start while others charge a fixed rate for 2, 3 or even 5 years, followed by a variable rate. If your bank offers you a fixed rate for the first few years of your mortgage followed by a variable rate, you should look at both rates to know if you are getting a good deal on your loan. Don’t just take the fixed rate as an indication of the cost to you. To explain this better, let’s look at an example:
Bank A and Bank B both charge a fixed rate of 3.99% for the first two years of a 20 year, AED1 million mortgage. But after year two, Bank A charges a variable rate of 4.36% while Bank B charges a rate of 5.4%. If you only looked at the initial fixed rate of both banks’ products, you may have assumed that they would have cost you the same. But in reality, your mortgage could cost you an additional AED100,000 more if you took it from Bank B. Especially if you plan to hold on to the property beyond those two first years of your mortgage, you should understand how the rate combination will impact you.
| Bank A | Bank B | ||
| Loan amount | AED1,000,000 | Loan amount | AED1,000,000 |
| Loan tenor | 20 years | Loan tenor | 20 years |
| Fixed rate for the first 2 years | 3.99% | Fixed rate for the first 2 years | 3.99% |
| Variable rate after year 2 | 4.36% | Variable rate after year 2 | 5.40% |
| Amount to pay back over 20 years | AED1,398,450 | Amount to pay back over 20 years | AED 1,507,125 |
Editor’s tip: Before choosing a home loan, carefully study the rate you are being quoted. Understand the difference between fixed and variable rates and know how much a combination of these could cost you over the lifetime of your loan. Don’t forget to also look at all the fees that you may have to pay on your mortgage. For more tips on how you can save money by comparing, follow us on twitter and check our #CompareToSave series.