Why UAE homeowners with mortgages are better off with a 1-year fixed-rate refinance deal

Dubai: For many property owners in the UAE currently paying mortgage payments – or about to start on these – it’s time they started thinking of the ‘one-year’ strategy. If they do, there is a good chance these homeowners will be able to reduce their monthly mortgage payment size to some extent.

This is how it can work – refinance the loan with a fixed one-year term. And UAE banks are willing to offer fairly competitive terms on any such refinance requests.

Ideally, property owners currently on variable rates should be the ones actively seeking out a 1-year refinance option. Because they are the ones who have been most impacted by the 11 interest rate hikes put up by the US Federal Reserve since March 2022 and which was reflected on loans in the UAE as well.

For instance, someone with, say, a Dh1 million mortgage payment obligation would be paying Dh2,000-Dh2,500 a month more during 2023 alone from the round of rate hikes. And it gets progressively bigger with higher mortgage exposures. Chances are that the property owner’s income – whether from salary increases or from renting out the unit – would not have matched the EMIs on the mortgages.

“UAE banks are showing more willingness to refinance and offer fixed-year rate benefits,” said a consultant. “This is why homeowners on mortgages should take a 1-year refinance deal rather than go into a variable rate scenario of 7-7.5 per cent.”

Why should they refinance now?

Because the US Federal Reserve has made it known that a rate cut might not happen in March as many had been hoping for. In fact, no timeline on when the first cuts will happen have been provided by the Fed.

Given that uncertainty, the immediate priority for UAE property owners on mortgages is to reduce the size of their EMIs, where possible.

Also, the other takeaway from the Fed meeting yesterday was that rate cuts are coming – only question is from when. So, a new refinance deal gives property owners some more time with lower loan instalments for now.

And once the 12 months are up, they will immediately get the benefit of interest rates having come down from their current peaks once the Fed gets started.

Clearly, a win-win scenario. 

Should they go with a new bank or stick with current?

Typically, refinancing deals involve a new bank bringing the property owner and his mortgages onto their books. Banks have been aggressively promoting their refinance programs for some time now – “Homeowners will find even their current back could allow them a refinancing at favourable terms,” said a mortgage consultant. “Banks wouldn’t want to lose clients, and staying put could even lower the add-on costs for the homeowner.”