Apartments in Dubai Marina. Bankers’ rationale is that it is better to chase opportunities among those who have had their credit records vetted. Image Credit: Clint Egbert/Gulf News

Dubai: Worried about what further US interest rate hikes could do to your mortgage payments? Try refinancing them … on terms that are still conducive to your interests.

And there are multiple reasons as to why favourable terms — including extended fixed rate periods — will be available. As retail lending activity tightens up in the near term, UAE banks are likely to be far more generous in what they are willing to offer those with existing loan exposures.

And mortgage refinancing takes the lead because of the longer terms — and margins — involved in paying them back. “Refinancing activity is clearly [an] indicator that the asset base is being anchored in terms of long-term money rather than the speculative “hot money” during the first boom-bust cycle in 2008,” said Sameer Lakhani, Managing Director at Global Capital Partners, the investment firm. “It is a healthy signal for further asset ownership.”

With refinancing, bankers’ rationale is that it is far better to chase opportunities among those who have already had their credit records vetted and are making payments on properties that have either been delivered or soon will be. In a soft market, these details counts a lot.

To net those clients, the banks could offer highly competitive lending terms, or promise them longer fixed-rate periods. This, from a mortgage taker’s perspective, is what could protect them from shelling out higher monthly instalments … at least for a longer term than what they got with their existing mortgage lender.

“On average, we can see lock-in rates for most banks falling between 2.99-3.99 per cent,” said Dhiren Gupta, Managing Director at 4C Mortgage Consultancy. “A few large banks have controlled their rates at the same level [even after the 0.25 per cent hike by Federal Reserve on December 16].

“If someone is willing to move to such lenders, it would be the right time if lending parameters and financially viability are there for the homebuyer.

“Lenders have their own predefined benchmarks that decide the rates and terms of lending, [with] rate variations among salary transfer and non-salary transfer cases.

“Banks, by and large, also set a higher rate for self-employed profiles.”

Even before the Fed’s hike on December 16, mortgage borrowers in the UAE had been busy refinancing. According to a recent Dubai realty update by Global Capital Partners, “there are instances where mortgage transactions outweigh sales, especially in periods of a downturn … implying a higher number of refinancing and other types of transaction are taking place.

“There are certain months where mortgages overtake sales, implying that a larger number of refinances or other types of transactions are under way. These instances are more common in periods of declining prices — Q3-2008 to Q2-2011 and from Q2-2014 to date.”

It is also less expensive for borrowers to switch sides, i.e. banks. As per Central Bank guidelines, a bank can charge the customer only 1 per cent or Dh10,000 — whichever is lower — to switch from one bank to another. This has “promoted the scope of refinancing deals,” said Gupta.

Also, “Concessions on refinancing deals like waiving the processing fees or free property valuations by the lenders definitely give borrowers the space to convert their old mortgage for better terms with other lenders. Undoubtedly, it gives more flexibility and a substantial saving opportunity in the long term.

“However, refinancing offers are not always identical for every borrower. It carries a lot of variation and has to be tread carefully to make it a smart move.”

Even a 0.25 per cent hike can tell on UAE borrowers’ payments

Assume a current interest rate of 3.99 per cent annually on property worth Dh2 million on which mortgage is offered for 60 per cent of the value. The loan amount will be Dh1.2 million and will have to paid in monthly EMIs of Dh6,327 over a 25-year tenor.

“But if we add the Fed hike of 0.25 per cent, then the revised rate would hover at 4.24 per cent and the cost on a monthly basis would be Dh6,494 — an almost 2.6 per cent rise in monthly payments,” said Dhiren Gupta at 4C Mortgage Consultancy. “If the Fed rates clamber further to 0.50 per cent, then the monthly will cost Dh6,663 which would indicate rise of 5.3 per cent on the instalments. This could be a substantial amount if the mortgage loan is managed for the longer term.”

The downside for banks in going heavy on refinancing

Such a surge could imply a “shortage of liquidity” across the layers of the local economy.

It means “businesses are pledging assets to cover for either their business operations or other expenses,” said an analyst.

“While this activity is normal, it leads to a sort of “moral hazard’ if prices fall and leaving bank balance-sheets vulnerable. The lack of liquidity may also imply other stresses in the banking system that need to be scrutinised.”