Which is Better a Personal Loan or Mortgage in UAE?

Personal loan vs mortgage loan is a crucial debate among borrowers. Generally, it is considered that personal loans are good for smaller expenses, and mortgage loans are better for capital-intensive expenses like real estate purchases. However, low interest rates in the UAE definitely make you question which one you should choose in the personal loan vs home loan debate. 

The defining tie breaker in most cases is understanding your requirements and also defining your loan amount and ideal repayment tenure. You must also know the difference between a personal loan and a mortgage to determine which option is best for you.

What is a Personal Loan?

A personal loan is defined by the Central Bank of the UAE as a loan offered to an individual customer. The loan is repaid using the borrower’s salary, end-of-service settlement, or any other verifiable and regular income source. 

• As an individual, the highest amount of personal loan you can avail is 20 times your monthly salary or total monthly income. 
• The CBUAE also states that the repayment period of a personal loan cannot exceed 48 months or 4 years. 

Your debt-to-income (DTI) ratio is also verified by the bank before processing any personal loan, and to get the best terms on your personal loan, your DTI should be well below 50%.

Personal Loans & Islamic Financing in the UAE

As an Islamic nation that follows the Shari’ah law, Islamic financing is also commonly available in the UAE. Banks and financial institutions offering personal loans under Islamic finance do not charge interest on personal loans, as charging interest is considered haram in Shari’ah law.

Instead, personal loans in Islamic financing follow Shari’ah-compliant lending processes, which involve the use of a Murabaha contract for the purchase of physical goods or a Tawarruq contract for emergency cash needs. These contracts allow banks and financial institutions to purchase the goods or services on behalf of the customer and then sell them back to them at an agreed-upon profit.

Advantages of Personal Loans in the UAE

Personal loans are a great way for you to raise capital quickly and meet any unexpected or sudden expense. The following list details the crucial benefits of a personal loan, which may help you determine whether a personal loan or mortgage loan which is better.

• Direct Fund Access: With a personal loan in the UAE, funds are transferred directly to your bank account, giving you full control over your finances. Unlike mortgages, you don’t get direct access - the bank pays the seller directly.
• Unsecured Debt: No collateral is required, making personal loans accessible to expatriates and Emiratis alike. Even in the event of job loss, banks can recover outstanding amounts from your end-of-service benefits.
• Enables Debt Consolidations: In case you are not able to pay off your outstanding debts, you can opt for a personal loan with a lower interest rate and consolidate the outstanding debts.

Who Should Opt For a Personal Loan in the UAE?

A personal loan is best suited for small to moderate expenses. They are best used to meet everyday expenses and to give yourself some relief from debt burdens, if required. If your reason for taking a loan is mentioned in the following list, you should consider taking a personal loan.

• Rent payments
• Medical expenses
• Educational expenses
• Travel expenses
• Purchase of personal items
• Home renovations
• Down payment for real estate
• Emergency financial requirements

What is a Mortgage Loan?

Mortgage loans, as defined by the Central Bank of the UAE, are any loan that you can take for the purchase, construction, or renovation of a residential property for living or investment. By its definition, mortgage loans do not cover commercial real estate; they are generally only offered for residential property. 

Certain regulations define mortgage loans, with the most important one being the loan-to-value ratio or LTV. This means you cannot get a complete loan for your property purchase, construction, or renovation. The CBUAE and UAE government regulations define that you can get a maximum LTV of 80%. 

This means the remaining 20% must be paid by you to show the lender that you are financially capable of handling a mortgage loan. So, in mortgage loans, the minimum 20% commitment from your end is considered as the down payment, and the remaining 80% (maximum) can be financed to fulfil your requirements.

Advantages of a Mortgage Loan in the UAE

A mortgage loan in the UAE has several advantages over a personal loan. Some of these include:

• Lower Interest/Profit Rate: Mortgages are secured by property, allowing banks to offer lower interest or profit rates. This reduces monthly instalments and total interest payments, though rates also depend on eligibility and debt-to-income ratios.
• Longer Repayment Tenure: Mortgages offer repayment periods of up to 25 years, making expensive real estate more affordable with manageable monthly instalments.
• Higher Loan Value: Linked to the property value, mortgage loans allow significantly higher borrowing compared to personal loans, while still keeping monthly payments reasonable due to extended tenure.
• Long-Term Appreciation: Real estate in the UAE tends to appreciate over time, helping you build wealth as your property value increases even while repaying the loan.
• Lower Risk Debt: Since the loan is secured against the property, personal risks are lower. Banks may also offer repayment restructuring in case of financial difficulties or personal emergencies.

Who Should Opt For a Mortgage Loan in the UAE?

As mortgage loans are available only if you are trying to buy, renovate, or construct a residential property in the UAE, it is the only reason you should or can opt for it. In some cases, banks may offer top-up loans on your mortgage; only those funds can be used as a personal loan, and will allow you to have the flexibility of a personal loan. 

However, it must be noted that getting a mortgage loan does not automatically make you eligible for a top-up loan in the future.

Conclusion

As a responsible borrower, you must understand your requirements, monthly income, and income security before opting for either a personal loan or a mortgage. 

The rule of thumb of keeping personal loans for small to medium personal expenses and mortgage loans for long-term wealth building with a residential asset can help you get started on deciding which one you should choose in the personal loan vs mortgage debate.

Frequently Asked Questions