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More banks in the UAE are giving property owners mortgages with a 5-year lock in. Should buyers opt for this? Image Credit: Shutterstock

Dubai: New property buyers in the UAE have just over a month to decide whether they will be better off applying for a mortgage from a bank or choose some of the developer-provided financing that’s available.

After this week’s 0.5 per cent increase, the US Federal Reserve’s next likely rate hike will be in February, and which would then be matched by the UAE Central Bank.

If they decide that taking a mortgage is still the best options, the question before them is how should they go about structuring the deal. A fixed rate for the first three years has been the most popular choice for new property buyers. Many existing investors have also managed to refinance with the 3-year rate lock-in to keep their monthly instalments in check.

Leading developers in Dubai are quite hopeful that the buying blitz recorded all through this year will extend into 2023 - even with the repeated increases in mortgage costs.

"Most buyers understand that the interest (increase) is relatively insignificant in the overall equation,” said Farhad Azizi, CEO of Azizi Developments. “Rental yields (in Dubai) still far surpass mortgage payments. Property values are surging, making real estate a lucrative, high-RoI (Return on Investment) investment choice that is exceptionally profitable despite the hiked rates.”

In our view, rising interest rates are doing little in deterring investors from purchasing property in Dubai. We see those who are sensitive to interest costs being more driven to invest now in order to lock in the current rates, anticipating that they will surge further in the near future

- Farhad Azizi of Azizi Developments

Why pay off landlord’s mortgage?

Azizi has another pitch lined up to convince new property buyers, whether they are paying outright in cash or through a mix of equity and debt. Rather than rent, become a property owner in Dubai. And stop paying for the ‘landlord’s mortgage’.

“Those switching from renting to owning know that their property pays for itself regardless,” said Farhad. “And rather than paying off their landlord‘s mortgage, they prefer to pay themselves with them then owning their property asset once the mortgage is repaid.”

Almost all of the major developers in Dubai now offer financing through their operations, with the 1 per cent a month payment option still the gold standard in such deals. (This 1 per cent option is also starting to be seen in Sharjah, as developers pursue all the possibilities that granting freehold rights brings by way of new buyer demand.)

Q1-2023 will be decisive

The final property sales tally for December and the initial weeks of 2023 will provide sufficient insights into whether the pace of buying activity has sustained itself. And of which, what the percentage of mortgage-backed sales are.

Are property buyers convinced?

This year, there have been seven rate increases altogether - and reflected in the mortgages - as the US central bank keeps trying to rein in inflation. (The UAE and Gulf central banks match these rate moves as part of their currency peg to the dollar.) Mortgage-backed property deals did tail off in the final three months of this year, as new buyers baulked at back-to-back increases in rates. Even with a 3-year lock-in, these buyers are unsure of whether they should take on a mortgage burden that would keep changing.

A 5-year lock-in

Some banks in the UAE are trying to soothe these buyer concerns through offering 5-year lock-ins. This way, property owners have the relative comfort of paying a fixed rate through these five years, something of a cushion in a constantly changing rate environment.

So, should someone buying a home in the UAE be thinking 5-year rather than 3 as lock-in?

“Five-year fixed rates are comparatively higher priced than the standard 2- and 3-year fixed available in the market,” said Dhiren Gupta, Director at 4C Mortgage Consultancy. ”A few banks have still kept their window open for 5-year fixed rate, which could vary from 4.99-5.90 per cent.”

Whatever the property buyer decides, it does looks optimal to have that fixed rate lock-in, to avoid distortions on their monthly mortgage instalments.

- Dhiren Gupta of 4C Mortgage Consultancy

That's the one constant for mortgage takers in the UAE - lock the rate on. And if interest rates do drop in, say, 2-3 years, there's always another refinancing they can enter into...