Existing mortgage holders in particular should be on the look out for possible refinance options. Now that US interest rate hikes are at a possible end, this is the time to check out financing options to keep the EMIs in check. Image Credit: Shutterstock

Dubai: Refinance…

Property owners in the UAE nearing the end of their fixed-rate mortgage payments should seriously be considering such a step – and right now. If they do so, they could be better placed to ride out upcoming changes to the interest rate cycles as they shift from the current peak to gradual cuts over the near future.

This is how it works if they refinance: “On a new deal, they will get a 5-5.5 per cent fixed-rate, which the mortgage holders can take for a new 1-year period,” said a consultant. “Because if their current mortgage goes into floating rates, their rate burden could be 7-7.5 per cent.

“Which is why refinancing should be a viable option for these property owners with EMI obligations. And in the next 12 months or so, we should see interest rates being cut and which will then immediately be reflected on home loans.”

Yes, entering a refinance deal will mean going through the steps of finding a new lender, and all the extensive paper work and processing time with such loans. All this in an environment where interest rates are at their peak after 11 rounds of US Federal Reserve increases since March 2022. But early this month, the Fed finally confirmed what consumers (and businesses) were hoping for – possibility of a full stop on more hikes.

This is why a refinancing could work well for existing borrowers.

Demand for mortgages in Dubai

Industry sources are divided on whether high mortgage rates have been denting into demand for home loans in the UAE property market. In Dubai, offplan sales make up 70-80 per cent of monthly transactions, and any mortgage exposure will happen only further down the line.

Michael Hunter is co-founder and CEO of Holo, a mortgage finance advisory based in Dubai. He says actual mortgage-backed deals are holding up well despite the rates.

“Mortgage transactions according to Dubai Land Department amounted to Dh30.7 billion in Q2-23 with 8,414, compared to Dh28.17 in Q3-23 with 8,345 deals,” said Hunter. “This is made up of residential, commercial and land financing.

“The numbers suggest despite the mortgage value being lower, transactions volumes are in fact very much the same.

“Where banks are requiring a higher down payment is on certain products that require less security. This is done to offset the risk on the loan.”

"When buying offplan, UAE banks are able to finance the final 50% due to the developer while still under construction, although limited banks do this." - Michael Hunter of Holo Image Credit: Supplied

Watch out for the refinance deals

In the coming weeks, expect local banks to start pushing loan and mortgage refinance options quite aggressively. Their pitch will be the same – that refinancing to a new fixed term can help lower or stabilise the monthly repayments. Because the floating rates at 7 per cent an more can add up to the EMIs quite substantially.

Based on UAE EIBOR rates, which have been above 5% for more than one quarter and might stay in the same range in the near future, refinancing to lower fixed pricing - if available - could be beneficial

- Dhiren Gupta at 4C Mortgage Consultancy

New fixed term - but for 1-year?

Ideally, if refinancing, opt for a fixed term of one year, because there is every chance that rates will head lower.

Also, mortgage holders should check whether their existing lender would consider extending the fixed-rate period. “UAE banks still offer fixed lending rates, but contingent on factors such as market circumstances, competition and customer demand,” said Dhiren Gupta, Managing Director at 4C Mortgage Consultancy.

“While extending the fixed rate period may result in a temporary loss of income for the bank, it could also lead to increased customer loyalty, which would benefit it in the long run. Additionally, banks may choose to offer other products and services to offset any potential loss of income from extending the fixed rate period.”

Whatever decisions mortgage holders in the UAE need to take on re-finance, they will be better off deciding within a 3-6 month timeframe. And sooner if their next EMI is likely to be hit with a 7-7.5 per cent rate…