What the looming US Fed rate hikes mean for your UAE mortgage

Interest rates are likely to increase in the Emirates because the dirham is pegged to the dollar, economists say

Although higher interest rates may discourage borrowing and dampen demand, UAE property still looks attractive after the recent reforms implemented by the government. Alamy

Related – Everything you need to know about buying property to hedge against inflation

Marc Compton, founder and managing director of Compton Conveyancing in Dubai, recently received his mortgage pre-approval and is waiting for the final offer letter from the bank to buy an apartment in Dubai Marina.

Although interest rates in the UAE are widely expected to increase after the US Federal Reserve’s meeting in March because the dirham is pegged to the dollar, Mr Compton, 33, says he did not rush to take out a mortgage before the decision because he has a long-term view on property investment in the UAE.

“I opted for a mortgage that offers a fixed rate of 2.99 per cent for five years and a variable rate of 1.54 per cent plus Eibor afterwards. If this increases, then I might switch to another mortgage provider in a worst-case scenario,” the 33-year-old British citizen says.

The UAE Central Bank’s decision in 2019 to fix mortgage early settlement fees at a maximum of 1 per cent, or Dh10,000, eases the process of switching lenders, he says.

Eibor, or Emirates Interbank Offered Rate, is the benchmark interest rate at which banks lend to each other in the UAE.

With Fed chairman Jerome Powell signalling that interest rate increases are imminent in March, consumers are likely to begin factoring in higher borrowing costs in their financial decisions, economists say.

The expected increase in interest rates is likely to encourage more people to take out mortgage applications before March to lock in cheap financing while they still can.

“We expect the Fed to start raising rates in March. We anticipate the Fed raising [it] four times in 2022 at 25 basis points per quarter,” says Scott Livermore, chief economist at Oxford Economics Middle East.

“It is highly likely that the UAE Central Bank will move in line with the Fed. The UAE economy is recovering well and inflation is picking up, so moderate tightening seems appropriate, notwithstanding the dollar peg requires monetary policy to be closely aligned with the US.”

Although higher interest rates discourage borrowing and dampen demand, UAE property still looks attractive despite rising prices and will continue to benefit from the recent reforms implemented by the government to boost the Emirates’ attractiveness to foreign investors, while mortgage costs will probably remain low over the next year compared with historical levels, Mr Livermore says.

The home mortgage market in Dubai grew by 68 per cent between the first and the third quarters last year, according to UAE property technology start-up Huspy, which acquired Dubai mortgage consultant Home Matters last month.

The number of completed mortgages recorded in Dubai doubled between the second half of 2020 and the first half of last year, according to Mortgage Finder, which did not disclose the exact figures. Forty per cent of Dubai sales transactions in the first half of 2021 were completed with a mortgage, the consultancy said.

Mr Compton chose a mortgage that factors into the loan upfront property transaction costs such as the Dubai Land Department transfer fees and the broker commission.

“If you are planning to be in Dubai for the next 15 to 20 years, it is more important to avail of the cheapest variable rate rather than a low fixed rate for the first five years,” he says.

“Going through a mortgage broker gets the job done quickly. You have to move quickly if you like a property, especially in a seller’s market like now. Brokers show you all the variables such as life insurance, home insurance, variable rate and the fee finance and you can make a decision based on your circumstances,” Mr Compton says.

Concern over interest rate increases is not the main growth driver of new mortgage enquiries, according to Mortgage Finder.

“Many clients who have contacted us recently have raised the question of potential rate increases and the possible impact of this on their future mortgage repayments. Although it is not something necessarily spurring most potential borrowers into action, it is certainly an aspect several have asked about,” says Mohamed Kaswani, managing director of Mortgage Finder.

Arran Summerhill, company director at Holo Mortgage Consultants in Dubai, agrees: “To date, we have not had many clients specifically referencing the possible Fed rate increases as one of the reasons for taking a fixed rate. We have seen more clients leaning towards a fixed rate to lock in deals at competitive rates and to give security against rate fluctuations.”

The question of a fixed rate versus a variable rate mortgage is dependent on a borrower’s situation and their future goals. Generally, clients who prefer more stability opt for fixed rates, whereas those who have shorter-term goals or are more flexible to change opt for variable rates, according to Mr Kaswani.

The rates available vary between banks but “we are currently seeing variable rates with margins as low as 1.79 per cent to 2 per cent, depending on the lender. These are fixed margins and sit above the prevailing Eibor rates”, Mr Summerhill says.

Meanwhile, fixed rates are between 2.5 per cent and 2.99 per cent for the better-priced deals, he says.

Currently, it is possible to get fixed rates as low as 1.5 per cent and market-leading products are in the region of 2.39 per cent to 2.99 per cent, significantly lower than in previous years, according to Mortgage Finder’s Mr Kaswani.

“If we look back to 2019, the leading fixed rate then was 3.75 per cent and this was not considered high at the time. Prior to this, the leading rates were in the region of 4 per cent to 5 per cent,” he says.

“Some of the best current mortgage products are shorter fixed terms, say one year, with a variable follow-on rate sub 2 per cent and no floor rate. This sort of mortgage is enticing to some borrowers regardless of the potential increase in Eibor, because even with a potential interest rate increase, the variable rates still remain competitive,” he says.

Although mortgage interest rates are likely to rise this year, any increase “will be gradual and measured rather than sudden”, Mr Kaswani says.

However, it is important to look beyond the headline interest rate. Instead, customers need to consider all aspects of the mortgage and take into consideration elements such as the reversion rate, floor rate and life insurance premiums, Mr Kaswani says.

There has also been interest among borrowers to refinance existing mortgages in the current low rate environment, either to benefit from a lower interest rate or to release equity from properties.

“The scenario we see with a lot of people looking to refinance is the option of releasing some equity from their property, which has increased in value over the past 18 months,” Mr Summerhill says.

“They can utilise this equity for property renovations or to put to a new property purchase. If they can take equity from the property at the same time as moving the loan to a cheaper option, then this makes more financial sense.”

Aside from the mortgage early settlement fee, borrowers must factor in other costs to take out a new home loan and register it.

These include a valuation for the new property, a mortgage registration fee and the trustee office cost. This can amount to Dh20,000 before the customer has made any savings, Mr Summerhill says.

Most home loan applicants last year were first-time home buyers, according to mortgage brokers.

“About 93 per cent of our customers were looking to purchase their first property versus just 7 per cent buying their second home,” Mr Summerhill says.

More than 80 per cent of Mortgage Finder’s clients last year were also first-time buyers.

“It is fantastic to see the UAE government’s change in loan-to-value ratios back in 2020 still having an effect and making home ownership more achievable,” Mr Kaswani says.

“Given the recent changes to cohabiting laws, it will also be interesting to see if banks in the UAE will adjust their lending policies to allow unrelated parties to purchase together. This will open up home ownership to another segment of the market that are currently unable to get on the housing ladder.”