Mortgage offtake in the UAE has had a good year to date. But will the series of rate hikes and more to come force prospective buyers into a major rethink? Image Credit: Shutterstock

Dubai: Developers in Dubai are bringing out a word they have not been using for some time in trying to find end-user buyers – discount. As mortgage rates in the UAE go through another 0.75 per cent increase, following the US Fed hike on Wednesday, developers, at least some of them, are trying to use straight ‘discounts’ to soothe end-user concerns about their mortgage costs.

“These ‘discounts’ are mostly happening in the mid-income space for properties of Dh700,000-Dh1.2 million, because developers do not want to lose out on price-conscious end-users,” said an estate agent. “We see some of this happening with newly completed JVC projects, which is now the place for mid-priced homes, Dubai South, and elsewhere.”

One such offer lists the discount for the buyer at an impressive Dh250,000, and with ‘zero commissions’. “These developers are sitting with newly finished homes, and all they need is a buyer to come in,” the source added. “If they hold on to their original pricing, they could soon have competition from others. Or see Dubai’s big developers line up new offplan projects at aggressive pricing from October onwards.

“There’s always that risk, which is why the discounts are being mentioned. Better for these developers to sell now rather.”

That’s true, because property sales in Dubai have been ticking along nicely in the year-to-date, with prices across freehold locations rising by more than 20 per cent. In more affordable locations, the gains have been around the 15 per cent range.

But at the start of the year, developers and property buyers would not have foreseen the US Fed turning this intense on rate increases to tame inflation.

Mortgage hikes hurt

So far, through the round of mortgage hikes in the UAE, there was a pattern of a slight lull on buying but would then pick up almost immediately. “We have seen the average 5-year fixed rate increase by roughly 1.76 per cent since March when the Fed introduced the first rate increase,” said Michael Hunter, CEO of Dubai-based mortgage services portal Holo. “(And) we have seen a trend of banks tightening or capping loan sizes on high value transactions.”

Banks don’t want lose out either

But banks cannot afford to take a less visible approach to supporting home ownership. This is where potential mortgage takers can seize an advantage. “While banks face the dilemma between their bottom-line and remaining competitive, we have seen a big increase in rate competition between the banks,” said Hunter. “Bank rates are becoming very similar, and this in turn has driven banks to focus on being attractive in other areas such as 0 per cent processing fees and waivers of valuation fees.”

We have seen the average 5-year fixed rate increase by roughly 1.76 per cent since March when the Fed introduced the first rate increase

- Michael Hunter, CEO of Holo
A 3- or 5-year lock in?
“In a market where mortgage rates are increasing month-on-month, we have seen demand for 3-5 year fixed rates increase significantly,” said Michael Hunter of Holo. “Clients seek long-term security against future rate increases.

“We have seen buyers opt for the 3-year fixed, as it gives you enough security in a period where we may then see the rates start to reduce whilst not being locked in for 5 years. Rates have increased dramatically as a lever to reduce inflation, this may continue short-term. But if successful, we could see the rates reduce as quickly as they have risen.”

Opt for developer incentives

The US Fed is not done with raising rates, all of which will immediately reflect on mortgage rates. It will be those who had taken out mortgages three or four years ago who will find it the most painful, because they would have moved out from the cover of fixed rates for the initial term of the payments to the lender.

For new buyers, developers are already offering fee waivers on multiple services, and if banks pass on their own set of waivers – such as on processing fees and on valuation – it does turn into a fairly decent saving for the new buyer.

They cannot forget to ask the bank for more – when it comes to fixed-rate tenors on new loans. A three-year fixed-rate term is more or less standard, but banks could be ‘convinced’ to extend this given the additional hikes in store.