Two back-to-back interest rate increases and a steady rise in property values - that is what property buyers are having to face. All the more reason why mortgage borrowers need to have a relook at their payments. Image Credit: Shutterstock

Dubai: Interest rates are higher by 0.50 per cent – and the one thing UAE’s property buyers seeking mortgages should do is try to lock in their financing rates for a longer period. This represents the best option for them to offset the higher cost of home finance, which will see further hikes through the year.

The half-a-percentage hike on Wednesday (May 3) would reflect on mortgage rates by between 1-1.5 basis points across lenders. “This means, for every Dh500,000 borrowed, it could cost an additional Dh5,000 per year,” said Michael Hunter, co-founder of Holo, the online mortgage platform. “However, it’s not all bad news – locking in a long-term fixed rate of three- to five years at a lower interest rate - while rates remain low - could mitigate the risk of fluctuation in expenditure. And likely ride out the high-interest rate period.”

This is the second increase since March, when the Fed hiked its base rate by 0.25 per cent and also indicated more ‘aggressive’ increases ahead. Wednesday’s rise sure qualifies as being in the ‘aggressive’ range.

Locking in does have its downside – “Lenders offer fixed-rate periods for up to five years, however, fixing over a longer period means it’s likely the interest rate will be higher,” said Hunter. “This is because the lender is making assumptions that over a set period, they will not make a loss on their costs.”

Stock - Holo Founders
Michael Hunter (right) with Arran Summerhill of Holo. "Pre-Covid, mortgage rates were typically 3.99%, whereas during the pandemic they dropped to around 2.69%. Rates are heading to pre-pandemic previous levels and with the possibility of further increases by the end of the year," says Hunter. Image Credit: Ahmed Ramdan/Gulf News

Switch mortgage lender?

Mortgage borrowers could also consider changing to another bank if this means getting a more favourable lending rate. “Those considering purchasing a property in the UAE at a higher rate can be assured that they will be able to change lenders in future,” said Hunter. “The UAE Central Bank rules mean that if you wish to make the switch, a maximum exit penalty of 1 per cent will be applied - but this is capped at Dh10,000.

“A mortgage rate will only be locked in once the lender books the loan. Therefore, if you are considering switching lenders, act now to take advantage.”

1 %

The exit penalty for a mortgage borrower in the UAE to switch banks

Drop in mortgage buyers

In the first three months of this year, mortgage-backed home purchases in Dubai declined compared with a year ago, according to data from DXBInteract.com. This also means that the Dubai property market is attracting more instant cash buyers, more so after the start of hostilities in Ukraine. A sizeable percentage of the new buyers are from Europe, according to market data.

For the UAE property market to retain the momentum from 2021, there will need to be a steady entry of more end-users thinking of home ownership. Right now, they are confronted with two outcomes – and neither are favourable. For one, property values are steadily rising, with the average transaction value for an offplan property during Q1-2022 being 16.90 per cent higher than what it was last year. For a ready apartment, the rise in average transaction value is closer to 20 - 30 per cent, according to DXBInteract.com numbers.

Mind your expenses

Borrowers in the UAE need to keep other details in mind, not least their monthly expenses as a percentage of their income. Because the earnings-to-salary (ESR) ratio will be tacked along all other borrower info by Al Etihad Credit Bureau, to help banks have a better reading on credit profiles. For end-users wanting to take out home finance, they will need to keep on the right side of all these scores.

According to developers, the US Fed’s insistence on multiple rate hikes will propel end-users to make up their minds soon about buying a home. “If they are thinking of mortgages, there is no reason why they should wait and then have to pay extra as more rate hikes come in,” said a developer. “On our part, we can keep the down payments lower, provide more incentives such as fee waivers, and even offer direct financing.

“But those decisions need to come fast.”

Amr Yussif, CEO of FinFlx, a gratuity management platform for SMEs.

Higher interest rates have an inflationary effect on the economy by default, and often slow down businesses, especially smaller companies. There are a number of regulatory changes taking place in the UAE at the moment, particularly with recent amendments to federal Labour Laws and the upcoming introduction of Corporate Tax in 2023, that will require SMEs to be more mindful of their bottom line in the long-term. They will likely think twice about borrowing at higher interest rates, which will limit borrowing to lines of business that can guarantee higher revenue returns.

Atik Munshi - Managing Partner, FinExpertiza UAE

With the base rate increase, enterprises would, to some extent, try to absorb it, though their bottom-lines are affected. Considering the impact of inflation, which has already crept into the economy, businesses are likely to pass over the costs to its customers by way of price increase over the long run. Some entities are trying to source funds through European and other banks outside the UAE, though this is difficult due to compliance, security collateral, jurisdiction and other issues.

Edward Moya, Senior Market Analyst – Americas at Oanda

Wall Street still believes the Fed will be able to deliver a soft landing and that is good news for equities. The key takeaway from the Fed is that they are not ready to consider larger rate hikes. Risky assets got a boost after Fed Chair Powell said, “So a 75 basis point increase is not something that the committee is actively considering…’