Dip in UAE interbank rate could ease mortgage payments

The drop in the benchmark three-month Emirates Interbank Offered Rate may give the sluggish housing market a fillip. Sarah Dea / The National

Homeowners in the UAE may see some relief in their monthly payments if a recent slide in the interbank rate – used as a benchmark for most mortgages in the country – continues.

The 4.4 per cent drop in the benchmark three-month Emirates Interbank Offered Rate (Eibor) to 1.38 per cent this week may also give the sluggish housing market a fillip. Last year, that measure rose by 39.9 per cent.

“The fundamentals of the housing market in the UAE look good, but people are acting cautiously and all it takes is a few pieces of good news or confidence-inspiring news,” said Andrew Covill, the director of the property agency Henry Wiltshire.

“It’s good for existing homeowners who may start paying less and for people who want to get a mortgage. If the rate drops a bit, that is good news.”

The fortunes of the key gauge, Eibor, depends on oil prices and US Federal Reserve interest rates, to which the country’s monetary policy is pegged. Oil prices have been on the rebound after Opec agreed in November to reduce supply, but at the same time the Fed has been raising rates, albeit at a measured pace. It may raise rates three times this year as the US economy rebounds.

Economists say it is too early to tell whether we are on the cusp of an economic revival, but confidence is improving.

“In general on the macro level, we do think that conditions are correlated with oil prices,” said Dima Jardaneh, a Dubai-based economist at Standard Chartered. “The improvement in oil prices because of the Opec deal has just gone into effect and [there is] improved sentiment, and that tends to translate into a perception of better liquidity. Whether it is sustainable or not is a different question.”

Over the past two years, banks have been hit by dwindling deposits as governments scrambled to find cash as a first line of defence, making lending more difficult and riskier as defaults increased. That has put pressure on the interbank rate, resulting in higher costs for homeowners at the end of each month.

The Governor of the Central Bank of the UAE, Mubarak Al Mansouri, said in November that he expects the economy to expand this year at a faster pace, giving a boost to flailing bank growth.

This may also reverse the weakening of demand for property, rental and sales, amid the oil price lull that has led to an economic slowdown and job losses since the summer of 2014, when oil began a long descent in which it lost as much as 75 per cent of its value.

According to the property consultancy Cavendish Maxwell, apartment rents in Abu Dhabi’s five key investment areas all fell by between 0.8 per cent and 2.5 per cent in the third quarter.

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