Borrowing money got cheaper this year as the UAE Central Bank followed the US Federal Reserve with three interest rate reductions during the past year, totalling a cumulative .75 per cent reduction, with many forecasters expecting more rate cuts to follow next year.
New borrowers, and those on existing variable rate packages, have seen mortgage interest rates fall with resultant lower monthly repayments. Consequently, home ownership has got cheaper and/or borrowers can take out larger funding at the same monthly cost. Mortgaged investors on adjustable loans have seen their outgoings reduce, a welcome relief at a time of falling rental receipts for many property types across the emirates.
Rate cuts have happened at the same time as other new flexibilities in UAE mortgage rules. Home loans terms are now technically permitted till age 70, borrowers can potentially stretch the length of their loan to help reduce monthly repayments. Another modification this year was the capping of bank penalty fees for early mortgage redemptions, making it cheaper for many homeowners to change lender and re-mortgage to a bank with a better offer. A revision of loan-to-value (LTV) rules remains a broader conversation still being had. Some are of the opinion that while the more restrictive ratios were right when they were introduced to a hot property market in late 2013, times are now different and the high deposit rules act as a barrier to entry for many potential owner-occupiers who would otherwise buy their own home and make a long term commitment. Conversely, many feel that such prudent practices are good for limiting the real estate exposure of UAE banks and helping mitigate against negative equity situations in a property downturn. Furthermore, hefty deposit requirements help focus a buyer’s mind and avoid rash decisions by their having to make significant down payments out of their own pockets.
As a valuation surveyor I would expect cheaper lending rates and more flexible mortgage rules to likely act as a stimulus for the UAE property market. While most commentators do not predict real estate price rises here in the short term, these stimuli will likely encourage buyer activity – as house-hunters see significantly cheaper sales prices now complemented with lower monthly mortgage repayments. With the US Federal Reserve expected to continue to be accommodative in 2020, with softer interest rates to encourage economic performance, and our dirham being pegged to the US dollar, further rate cuts are predicted.
ValuStrat’s research department has reported increased transactional activity volumes in Dubai’s residential real estate market in recent quarters – this is an interesting barometer and may be reflective of improved market sentiment, as buyers see value to be had by way of much-reduced purchase prices and now lower monthly mortgage repayments too. Barring a larger economic shock, we would expect this trend to continue.
Of course, interest rates will not stay so low forever, but “lower for longer” now appears to be the perceived wisdom on borrowing costs. Nonetheless, both banks and borrowers should ensure that sensible stress testing is done to be sure that borrowers can afford repayments when rates next start to rise.
As regards longer lending terms of 30 and 40 years, it is true that mortgagees benefit from reduced monthly repayments when the term of their loan is pushed way out. However, it should be remembered that borrowers pay much more in total interest payments over longer mortgage terms. Noting that a bank will take most of each monthly repayment in the early years towards interest charges, with less being chipped away off the original principal amount borrowed. In fact, those redeeming such a long-term mortgage in the earlier period may be surprised as to how little has actually been paid off the initial amount drawn down. However, the lower monthly repayments that longer-term loans create can be a boon for younger families in trying to help reduce monthly instalments so that other family expenses can be met. Medium term goal should be that higher monthly payments are made in the future when incomes have risen and other family costs such as educational have passed.
The UAE is still predominantly a cash-led property market. However, as the real estate sector matures and looks towards medium-term recovery, and with more buyers now using bank funding, the current mortgage environment may be helping as an incentive at just the right time.
Declan King is managing director and group head of real estate at ValuStrat. the views expressed here are his own.