Boasting a soaring economy, tallest skyscrapers, world-class attractions and landmarks, Dubai attracts a huge number of people every year. These include tourists, entrepreneurs, shoppers, job seekers, and those looking for a new place to settle. Since the UAE now offers long term residency in the form of silver and golden visa schemes, it is now possible to live in Dubai and other emirates for a long period.
Having said that, the biggest hurdle here is the high property prices. It goes without saying that properties in Dubai are expensive, particularly when we talk about ready-to-move-in properties. Even if you’re buying it in a far off area, you will still have to burn a hole in your pockets. However, there’s still a way you can buy a property in the emirate without breaking the bank. We are talking about rent to own scheme in Dubai. Let’s find out everything about this scheme here!
What is Rent to Own Scheme?
Rent to own scheme is basically an agreement between the buyer and property developer/owner. In this scheme, the rental payments deposited throughout the agreement tenure cumulatively make up the down payment of the property. This way, the buyer doesn’t have to manage both the rent of a property and the down payment of another property they intend to buy, as this scheme merges both of these options for them.
In layman terms, a rent to own scheme enables the buyer to own a property they have rented once the agreement expires. Apart from the amount they have already paid before (as the down payment), they can obtain a home mortgage loan for the remaining amount or exit the agreement without any obligation.
Types of Rent to Own Agreements
Generally, there are two types of agreement in rent to own schemes. These are:
Option to Purchase
As per this agreement, the buyer is obligated to pay an option fee at the time of signing the contract. It is usually a specific percentage of the total property prices set after a mutual understanding. This agreement states that the buyer reserves the right to buy the said property in later stages. In case the buyer doesn’t buy the property (due to any reason), they lose the option fee as it is non-refundable.
This agreement doesn’t involve any option fee. The buyer and developer mutually decide terms, including the fixed purchase price at the time of signing the contract. In some cases, the property purchase price is not decided when the agreement is signed. It is determined at an agreed date in the future, based on the market conditions.
The Legal Value of Rent to Own Scheme in Dubai
It is a legal arrangement in Dubai. A rent to own (ijarah) service has been launched by the Dubai Land Department (DLD) for the purpose of facilitating transactions involved in this scheme. It is basically a specific title deed register that provides a clear legal framework for rent to own deals and transactions.
Difference Between a Home Loan Mortgage & Rent to Own Scheme
Many people confuse a rent to own scheme with home mortgage loans since both options involve regular payments which are used to own a property. However, both these schemes are quite different in three major ways. These include:
Both rent to own and mortgage options require the buyer to pay an upfront cost. In the former option, it is called down payment. However, the amount paid as the upfront cost differs significantly in both these cases.
According to the regulations by UAE Central Bank, the buyer is required to deposit a minimum 25% of the purchase price as the down payment in case of buying a property via bank mortgage. On the other hand, the upfront cost for rent to own scheme lies somewhere between 5 and 8 per cent of the property value.
As established earlier, in a rent to own scheme, the buyer pays regular instalments in the form of the rent of the property. However, there’s no rent factor involved in the home loan mortgage option. The regular instalments make up the total property price. Whereas in the former option, instalments combined are used as a down payment.
Buying a property via a home mortgage loan includes other upfront expenses, apart from the down payment. These include DLD fees (approx. 7 to 8 per cent of the purchase price), bank fees, real estate agent commission, etc.).
As per DLD, buyer fees (2% of the sale price), title deed issuance fee (AED 250), map issuance fee, 0.25% of the rent amount, knowledge fee (AED 10 added to each fee) are some of the expenses are to be borne by the buyer when entering a rent to own agreement. Furthermore, they also have to pay a registration fee. It is AED 2000 if the property costs less than AED 500000. In case the property price exceeds AED 500000, the registration fee increases to AED 4000.
Major Benefits of Rent to Own Scheme
An Easy, Inexpensive Way to Buy a Property
This scheme allows a tenant to become the owner of the property in an easy, hassle-free, and affordable way since they do not have to pay a large down payment.
It Does Not Involve the Complications of Home Loan Mortgage
Getting a home loan approved can be quite complicated. It requires the applicant to meet eligibility criteria, which can be quite strict. Failing to do so can result in application rejection. With a rent to own scheme, these issues aren’t prevalent since the process is quite hassle-free.
Experience Living in the Home Before Buying it
Rent to own scheme is beneficial in the way that the buyer can live in the home before buying it. It allows them to experience life in the dwelling and ensures it meets their requirements.
Generally, a tenant can easily exit the scheme without buying the property once the contract has reached its maturity. They are not obligated to buy the said property; however, if they have paid the option fee, it will be retained by the developer.
Things to Know Before Pursuing Rent to Own Scheme
- The rent is usually higher in this scheme as compared to the market value.
- Once the agreement has ended, you will have to qualify for a home mortgage loan to complete the purchase.
- A payment plan for rent to own schemes varies from property to property. It is drafted on the mutual understanding and agreed upon terms and conditions of both the parties involved.
- The contract should be drafted carefully. It should include:
- Purchase price of the property (if both parties have agreed to decide it initial stages)
- Timeframe of the contract, title deed ownership
- Exit terms
- Penalty clause in case of defaulted repayments
- If both parties agree that the developer will refund a certain per cent of the down payment in case the buyer exits the contract, it should be mentioned in the contract as well.
- Clauses pertaining to mortgage rejection (when the lease term ends), missed repayments, job loss, etc.
- Terms pertaining to property management. It should clearly state who is responsible for the maintenance and upkeep of the property during the time the contract remains valid.
- It is important to understand the terms and conditions of the contract. If there are any exit clauses mentioned in the agreement, you should know everything about them as well.
The Way Forward
To summarise, rent to own schemes facilitates tenants and help them accomplish their dream of becoming property owners in Dubai. However, it is crucially important to seek expert advice at the time of entering the agreement to avoid landing in troubled waters in the later stages.