Choose carefully off-plan payment plans or mortgage

Dubai - Payment plans are a way to avoid the hassle of going through a bank and getting a mortgage

In a tough market, the creatives always find a way to get things done. In 2018, there was a 27.7 per cent decline in off-plan sales compared to 2017. This reality has prompted a handful of developers to find ways to boost sales.
We have seen an unprecedented number of offers from developers when it comes to payment options, including very creative payment plans, and they are sure to keep coming. As we look at a breakdown of the payment plans, some questions to keep in mind are: "Who is the target market for these plans?" and "Are the payment terms viable for enough potential buyers?"
Off-plan scenario
Looking at a recent off-plan payment plan offered by a developer, townhouses were on offer for Dh2.5 million and the breakdown of the payment was 50 per cent during construction and 50 per cent mortgaged post-construction. The payment plan post-construction was Dh2,500 per month for the first five years of a 25-year mortgage. Furthermore, the developer was offering zero transfer fee, valuation fee and mortgage fee, plus 3-month fixed Emirates Interbank Offered Rate (Eibor) with one per cent margin for life.
Considering those terms, when we look at what a plan like this means for your pocket each month, assuming the construction takes 3 years, the amount due per year, pre-completion would be an estimated Dh417,000 if it takes four years.
Construction completes, and your home is ready. You still owe 50 per cent, but the bank this developer partnered with will mortgage that amount to you over 25 years. Remember, the developers offering for the monthly payments for the first five years is Dh2,500, without interest. So quite simply, you're paying Dh2,500 per month, or Dh30,000 per year for five years. When that payment period finalises, you have the next 20 years of payments with interest. While Dh2,500 sounds attractive, especially considering that you'd pay far more per month for renting a property that costs Dh2.5 million, bear in mind the payments more than double after five years. However, with that said, when they do double, the total annual payment is still far less than what a property with that value will cost to rent. 
Ready, completed property scenario
Let's now say you purchased a Dh2.5 million property that was completed and ready to move into, with a 25-year mortgage. Your down payment requirement would be a minimum of 25 per cent, could be more depending on a number of variables the bank decides against when it comes to calculating your mortgage eligibility. Let's just say you get the maximum LTV (loan-to-value) rate of 75 per cent. Your down payment, due immediately, would be Dh625,000 on a Dh2.5 million property. In addition, there is seven per cent in associated fees, therefore your total up front payment would be Dh800,000 on this property.
Considering those figures, the total value of your mortgage is Dh1,940,670 with an assumed 3.5 per cent Eibor, that may vary but those fluctuations would add little to the bottom line. Your annual payment, over 25 years would be Dh77,626.80 or Dh6,468.90 monthly.
In the first off-plan example, you'd pay 50 per cent of the property's value, Dh1,250,000, in three or four years, however long construction takes. Whereas if you follow the traditional mortgage route, and purchased that property when it's complete, and put a down payment of 25 per cent, you'd pay Dh625,000, plus another Dh175,000 in fees at once. With the payment plan option, your monthly payments are less than half for five years, giving you some liquidity. However, you have to be prepared for it to jump up by about 54 per cent after those five years, for a 20 year duration.
From the developer's perspective, they believe buyers, whether they are the occupier or an investor, are getting a quality product, in a city that has unlimited potential when it comes to the future value of property. Payment plans are a way to avoid the hassle of going through a bank and getting a mortgage, and while the payments may be steep for some, in the end, the property is fully paid off in less than 10 years.
The writer is director of research and data, Property Finder. Views expressed are her own and do not reflect the newspaper's policy.