Emirates NBD this month joined a group of banks that have changed the way they calculate mortgage rates, a collective shift in the lending industry with significant ramifications for the property market. Virtually all UAE banks now set their mortgage rates internally rather than pegging them to what is known as the Emirates interbank borrowed rate (Eibor). This new policy gives the banks more flexibility to match rates with their costs of funding, but reduces the transparency around how they make those decisions.
The Eibor rate, which is publicly available, represents the rate that banks pay one another when they borrow. By abandoning Eibor, the banks are able to set rates as they choose - an option they say is included in the mortgage contracts they give to consumers. But for those borrowers, this means they could find their payments increasing sharply without warning. "It is clearly just banks trying to generate more revenue," says one Dubai mortgage holder, who asked not to be named.
The potential impact on property owners first became apparent late last year, when a group of Mashreq Bank customers complained that their payments climbed as much as 30 per cent after the lender notified them it was shifting off Eibor. They also say their contracts do not allow for such a change. More than 25 of those customers later sued Mashreq, although the bank has said it is "confident in its legal position" and that it "conducted detailed open and direct communication with all of its customers" about the change. The lawsuits are pending in Dubai courts.
However, in recent months, other UAE banks, including Emirates NBD, have quietly followed Mashreq's lead in switching to internal rates. Emirates NBD is the biggest bank in the country by assets. On local online bulletin boards this week, Emirates NBD customers complained that the change would result in sharply higher mortgage payments. In a statement, an Emirates NBD spokesperson said: "The move is in keeping with regional and global industry standards, as most banks in the UAE have moved from Eibor to an internal base rate benchmark.
"The bank remains committed to update the [internal rate] on a regular basis and any benefit will be passed on to the consumer." HSBC said this week that it still offered a mortgage tied to Eibor. Several mortgage brokers, who work with a variety of lenders, confirmed that HSBC appears to be the only regional bank that continues to do so. The banks that made the adjustment say they were compelled to make changes because of the unique forces at work in the UAE in the aftermath of the financial crisis.
The Central Bank has aggressively pushed to keep Eibor rates low to stimulate lending and the economic recovery, but the banks argue that their cost of funding remains much higher because overall liquidity has not yet returned to pre-crisis levels. Switching to internal rates "gives the banks a little more security" that they will not be forced to price loans to artificially low Eibor rates, says Dean Biddulph, a mortgage broker in Dubai.
The vast majority of mortgages available in the UAE are variable-rate products that adjust each quarter. "There is pretty much only one package," Mr Biddulph says. Some existing mortgage holders said they believed they would benefit if interest rates went down. Instead, when this occurred, the banks simply moved off Eibor, which effectively raised the rates on consumers. The borrowers say that violates the premise of an adjustable rate mortgage in which banks and borrowers agree to float with the market. "I took a risk and the bank took the same risk," says the Dubai property owner.
Along with other Mashreq Bank customers, he appealed to the Central Bank, which regulates UAE lenders. He got no response and says he hopes that customers with other banks who start to feel a similar impact will join their coalition. "We need to get people together and make enough noise that somebody has to sit up and listen," he says. Many existing mortgage holders may have few options if their contracts explicitly give banks the right to change rates at any time. Mortgage brokers say several lenders have changed their contracts to include that language lately.
Analysts say the recent changes reinforce the need for customers to read contracts closely. In addition, when calculating how much you can afford to spend on a property, be sure to calculate monthly payments based not only on current interest rates but also look at how much payments should rise if interest rates climb. Most industry observers say the row over mortgage rates is another set of growing pains for what remains a young property market. As it matures, banks will likely begin to offer new mortgage products that give them and their consumers more flexibility.
In some countries, variable-rate mortgages come with a cap on how much rates can rise. In the US, fixed-rate mortgages are popular because they establish the mortgage payment for the life of the loan at the outset. If rates rise, the property owner retains the right to refinance his mortgage in exchange for a pre-determined set of fees, which could be worth paying for the consumer if the difference in rates is great enough.
Abu Dhabi Finance, the Government-owned mortgage company, is offering mortgage rates as low as 5.75 per cent for qualified borrowers, among the lowest available. The company is also advertising increased flexibility for borrowers, including payment holidays. Abu Dhabi Finance officials could not be reached for comment about how the company's interest rates are established. Eventually, analysts say, a thriving property market is dependent on buyers feeling confident that their mortgage rates will be set fairly.
But at the moment, potential buyers are as concerned about the overall health of the property market and waiting until after Ramadan to make major decisions, says Jane Woods, development manager with LLJ Property in Abu Dhabi. Besides, she adds, "I don't think most people understand" the mortgage issue. breagan@thenational.ae