Advantages of Mortgages in Dubai

Equity Release

It’s a little known fact that in Dubai equity release is only allowed under certain conditions that comply with regulatory requirements.

There are two reasons for which equity release is generally approved:

1. Home Renovation: Funds can be used to improve the property itself, increasing its value and living quality.
2. Property Purchase: Equity release can be approved for purchasing additional properties, however these properties must be within Dubai or the wider UAE.

The rules around equity release in Dubai make it very difficult for individuals to use property as a store of value from which funds can be drawn for other purposes, as is the case in other jurisdictions.

If an individual moved to Dubai and acquired a property in cash for AED 100 million, they would not then be able to take out a mortgage secured on that property with the funds released being used to take advantage of an external investment opportunity or to fund the acquisition of a property in London, for example.

Autocracy in the UAE

Dubai operates under an autocratic system. The emirate is part of the United Arab Emirates, which is a federation of seven emirates, each ruled by its own hereditary monarch.

In Dubai, while there is a high degree of stability and a pro-business environment, the political system lacks features commonly associated with democracies, such as open elections, political parties, and legislative representation by elected officials. Instead, decisions are primarily made by the ruling Emir and a council of appointed officials.

Leveraging a mortgage when purchasing property in Dubai allows investors to retain liquidity by minimizing use of their own funds, which can act as a safeguard, especially in a market where political dynamics differ from democratic structures seen elsewhere.

1. Reduced Exposure to Volatility: With Dubai’s economy stabilizing and housing prices becoming less volatile, a mortgage mitigates the need for substantial upfront capital. This approach provides a hedge against market fluctuations, letting investors benefit from property appreciation without over-committing their liquid assets.
2. Preserve Cash Flow: By not tying up cash in a property purchase, investors can diversify across multiple markets, sectors, or asset types, thereby reducing concentrated exposure in any single jurisdiction.
3. Flexibility and Access to Capital: Keeping liquidity available by leveraging a mortgage ensures that investors are well-positioned to respond to new opportunities or challenges, both locally and globally. With a mortgage, it’s easier to maintain a balanced portfolio and avoid having “all eggs in one basket.”
4. Safeguard Against Regulatory Shifts: With Dubai’s stable yet non-democratic governance, a mortgage allows investors to retain more control over their assets, enabling an easier transition of funds if circumstances or regulations evolve in unexpected ways.

Arbitrage Opportunity

Using a mortgage to acquire property in Dubai presents a compelling arbitrage opportunity, where investors can capitalize on high property yields and relatively low financing costs. With residential properties in Dubai generating yields around 10% per annum, and mortgage interest rates typically below 5%, there’s a clear potential for profit through this yield differential. By financing a property purchase at a rate lower than the rental income it can generate, investors effectively harness positive cash flow, maximizing returns while preserving liquidity. Additionally, with Dubai’s favorable tax environment - no income tax or capital gains tax on rental income - the net yield is attractive, enhancing the overall arbitrage advantage. This approach enables investors to grow wealth through rental income and potential property appreciation.