UAE home owners feeling weight of rising mortgage rates

Dubai: Property buyers in the UAE who have taken out mortgages can definitely share one sentiment with President Donald Trump — that the US Federal Reserve should stop hiking interest rates frequently.

Because each time the Fed does so, these property owners are staring at the possibility of higher payments on their mortgage exposures.

And right now, mortgage rates in the UAE are already at a 10-year high, with the average at 5-5.75 per cent and heading into the 6 per cent and over range with the next Fed increase, widely expected to happen next month.

“The Eibor (Emirates inter-bank offered rate) is already at a 10-year high of 3.49 per cent, which is what local mortgage rates are set around,” said Sameer Lakhani, Managing Director at Global Capital Partners, the real estate consultancy. “By extension, this means that mortgage rates too are at a decade’s high.”

The Eibor — which is the rate at which inter-bank transactions in the UAE are charged — was at 2.45 per cent in October 2009 and reached its lowest point in the last 10 years in October 2014, when it was 1.01 per cent.

Higher rates have already started to bite into the budgets of homeowners here. Banks typically give a two-year fixed rate, and many of those who took out mortgages in 2016 will be shifting to a floating — i.e., higher — rate mechanism.

And for those just taking out a mortgage on their newly acquired home, they will find that banks will less generous handing out extended fixed-rate terms.

In short, those monthly mortgage payments are going up, if they haven’t already.

Mortgage-based property deals soar in Dubai

The number of mortgage-based transactions as a percentage of overall property sales in Dubai has been consistently above the 70 per cent mark in recent months. That compares favourably with the mid-50 per cent to low 60-per cent range that was there as recently as in 2016 and early 2017.

At that time, Dubai’s property market was dependent on cash-ready investors rather than end users. Now, the transition has happened. Each passing month sees sales of ready properties dominating the transaction charts with the Dubai Land Department.

Not just that, average property deals in the city are trending below Dh1.5 million, which suggests that more end-user buying activity is taking place. This is the activity that could take a hit when interest/mortgage rates are on the rise. And enough to give jitters to developers with projects completed or nearing completion and waiting for potential buyers to show up.

Some local banks are already making adjustments in their offers to offset client concerns, according to Dhiren Gupta, Managing Director of 4C mortgage consultancy. “They have kept the bank margins at lower levels, which gives property buyers the incentive to lock in the base rate at a much lower rate.

“Or they are providing a longer fixed rate period, which countervails concerns of rising Eibor rates. And once the fixed rate period ends, the property owner can negotiate with the lender and review the market for other options.”

Whatever be the mortgage rate levels, Lakhani says there is no need to let go of the optimism over the growing demand for ready homes, which is where most of the mortgages are taken out. “In the current environment, there is a lot of chatter regarding LTV [loan-to-value] percentages and interest rates,” said Lakhani. “But it is important to note that despite all of this, transactions in the ready property market are poised to end the year higher than that in 2017. This obviously means that there is some traction in the secondary market and that the forces in play are not as straightforward as the traditional surface level narrative.”

Fixing the fixed-rate period will be key

With a bit of flexibility, banks in the UAE can still tap the growing demand for mortgage-based transactions. Typically, banks offer a two-year fixed rate period at the start of the mortgage payment tenure.

“But this is dependent on individual bank offerings and the level of sophistication size of their balance sheet and treasury management,” said Sameer Makhani of Global Capital Partners. “We have seen offerings ranging up to five years on a fixed basis. These sometimes reset as well depending on the client.”