Islamic vs conventional mortgages in the UAE

Mortgages in the UAE can last from anywhere between four to 25 years and property investors in the UAE can choose from Islamic or conventional financing. Islamic financing in the UAE is managed by Islamic banks and has become a competitive alternative to conventional mortgage financing.

However, buyers should keep key differences between both in mind when looking for financing that suits their requirements.

Conventional mortgages in the UAE

Conventional mortgages are issued by private lenders, banks, and specialised mortgage companies. In conventional mortgage loans, money is considered a commodity. Banks lend money and charge interest on the loan to purchase a new home. The mortgage includes the principal (the amount being borrowed by the buyer) and interest (the cost of borrowing, calculated using fixed or variable annual interest rates).

In the first few years, mortgage payments will generally carry a larger interest payment component. This means that a larger portion of your monthly payment will serve to pay off the interest charged by the bank, while payments toward your principal will be lower. Over time, the portion of your payments devoted to repaying the principal will increase, while the interest component will decrease. This is because conventional banks will look to collect the profit/interest first before recouping the amount borrowed.

Islamic mortgages in the UAE
An Islamic mortgage is different from a conventional mortgage in the UAE because it is forbidden under Sharia law to charge interest (riba) on a loan. Islamic banks in the UAE will either offer mortgages by either offering fixed and marked-up payment terms or charging rent. Once all the payments are complete, the property can be transferred from the bank to the mortgage buyer.

There are two primary options used by Islamic banks in the UAE to offer housing loans:

Murabaha financing:

·       Lending institution buys the property on behalf of the customer and then resells the property to the customer at a profit

·       Customer pays the lending institution in monthly installments

·       If a buyer fails to repay the monthly installments, the mortgaged property is retained by the Islamic bank

·       Mortgaged property is usually registered in the name of the bank, although some banks will use the name of the tenant in the title deed

·       Primary is that there are no interest payments;. the bank charges a fixed amount of fees

Ijarah financing

·       Involves the creation of a trust that is registered as the owner of the property and leases the property to the customer

·       Customer pays a down payment and monthly rental payments

·       Customer's equity in the property increases, and they become full owners after after the final amount is paid the customer gets the property

We hope you found this article helpful. Are you considering buying a property in Dubai or Abu Dhabi?  For support in getting your mortgage, start your journey and get pre-approved today with Lenddoo, the most trusted mortgage broker in the UAE !