Can’t wait to find out what Rent to Own is? Scroll down to the Highlights. Read on for to learn in detail.
The advent of Rent to Own offerings in Dubai is a testimony of how reactive the market has become. As a result of the constant correction in rental prices, there is hardly any difference between the rent and the monthly installment for a bank mortgage. This means if the monthly rent is paid to a bank instead of a landlord, the tenant can own the same apartment.
Then why don’t they? Why are renters still not purchasing properties?
The answer is in most cases is… the Mortgage Cap.
The Mortgage Cap is a limit set by the Central Bank of UAE on the Loan to Value ratio. Bank and Financial Institutions in Dubai can only lend a maximum of 75% of the property value. The buyer has to arrange for the remaining 25% of property value + 4% DLD charges + 2% Commission + Registration Trustee Charges. The buyer needs to pay an average of 33% of the property value upfront.
Let’s look at this with an example…
If someone wants to buy a 1Br apartment for 700,000, they will have to pay at least AED 231,000 upfront. The bank installment for the 75% mortgage will be AED 3,113 i.e. annual payment of AED 37,358. Now, if one rents this property the annual rent will at least be AED 55,000. So, purchasing an apartment will not only build you an asset but also help you save at least AED 15,000 a year. There it is, your World Tour just got sponsored!
But what about the AED 231,000 downpayment? Where will I get that?
This is where Rent to Own comes in. Here, the buyer can pay for the downpayment in the form of rent. The contract consists of two transactions, the rental and the sale. The buyer gets to rent the property for a lock-in period (usually, three years). At the end of this period, he/she can choose to buy the same property. If they do, the rent paid during the lock-in period will be considered as the downpayment. The balance can then be paid by a bank mortgage or by self-financing.
Highlights of Rent to Own:
- Property to be rented for a lock-in period (usually, three years)
- Same property can be purchased at the end of the lock-in period
- The rent will be considered as a downpayment for the purchase price
- The difference can be paid by bank mortgage or self-financing
- The purchase price and the rent for the entire lock-in period will be fixed at the beginning
- The buyer can exit and choose not to purchase the property at the end of the lock-in
- The rent is a little higher than usual
- The premium on rent is justified as it is going to contribute to the purchase price
Rent to Own is gaining popularity in Dubai as it is a win-win for the buyer and the developer as well. The buyer can purchase a property without having to worry about the downpayment. The developer can fill up his vacant inventory and earn a little premium.
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