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The years of easy credit and low interest rate payments are over. Property values are on the rise and so is the cost of a mortgage. Image Credit: Shutterstock

Dubai: Property owners in the UAE whose fixed-rate mortgage payments have - or will - come to a close will immediately feel the full impact of the latest interest rate hike by 0.75 per cent. In the last two months, the rate has risen by a combined 1.5 per cent, and for these property owners, it adds up to a sizeable monthly payment from now on to their banks or mortgage lenders.

This particularly impacts those who took out mortgages in 2019/20 and who were offered 2- or 3-year fixed-rate terms at the time. For many who bought at the time, having access to the lowest ever mortgage dates was a prime motivating factor in making the purchase at that point in time. And no one would have foreseen this year’s series of interest rate hikes triggered by the US – and mirrored in the UAE. And with more to come.

After the two- or three- year fixed-rate term, monthly payments will fully reflect changes in the interest rate environment. And in recent weeks, there have been quite a few of that.

“Banks in the UAE still offer 1- to 3-year fixed, but with a higher band range of 3.74- 5.25 per cent, which further increases after the latest announcement by the Fed last Wednesday (July 27),” said Dhiren Gupta, Managing Director at Dubai-based 4C Mortgage Consultancy.

Still within payable limits

Rate hikes are having an effect on the number of mortgage-backed purchases in the UAE, more so after June’s 0.75 per cent rate increase. Another one so close to that effectively slows down end-user – those who typically would want a mortgage support – activity in the market.

Sawan Karia is the Head of Brokers’ Channel at the mortgage-focussed fintech Huspy. He reckons that the drop in mortgage deals may have other contributing factors too. “We need to consider other external factors. Historically, July and August are slower months because of summer travel,” he added. “This year - the first proper one after Covid travel freezes - we have a lot of people travelling and for longer durations. So, the big purchase decisions are delayed.”

And even with the additional monthly payments, on a Dh2 million property, it would be just under Dh2,000. “This of course depends on various factors including down payment value, terms of the loan, duration, etc.,” Karia added. “With interest rates at about 4.5 per cent and an RoI (Return on Investment) of 5-8 per cent, a home remains the preferred option for those wanting ownership of a stable asset amidst the uncertainty in global markets.

“While inflation has played its part in increasing property prices, owning a home still remains a priority here in the UAE.”

Developers need a rethink

The big question is how will developers in the UAE react to the now constant rate hikes? Providing additional incentives would be a must, starting with the mid-sized developers planning offplan launches.

Developers must realise “their potential customers have a lot less money to spend than they did just six months ago,” said Shahzad Saxena, CEO, Safe Developers. “The situation is changing so quickly that even the consumer realizes only once he sits down to do the finances.

The situation is changing so quickly that even the consumer realizes only once he sits down to do the finances.

- Shahzad Saxena, CEO, Safe Developers

“Due to the prevalence of payment plans in Dubai’s offplan market, developers had been acting like banks by letting customers pay around 30-70 per cent over a two– to four-year time during construction and the remaining after handover anywhere from two- to seven years. That compares to a UAE bank that requires a 50 per cent down payment and finances the remaining over 10-30 years.

“This potentially gives the offplan buyer the advantage of treating the developer as an ‘interim financier’ until rates drop again and they can obtain longer financing from the banks. Developers who are more flexible and accommodating in their payment plans are the ones who will fare better in these times.”

Increase commissions and bonuses paid to brokerages. Developers stopped doing that as they knew there is huge demand. Brokers didn't have a choice but work on half commission and without any bonus.

- Emad Haq, Vice-Chairman, H&S Real Estate
What developers in UAE could consider bringing back
Give easy payment plans, which would be 5 years and more post-handover;

Give offplan buyers 50-100 per cent discount on Oqood charges at the Land Department;

Increase commissions and bonuses paid to brokerages. Developers stopped doing that as they knew there is huge demand. Brokers didn't have a choice but work on half commission and without any bonus.

- Emad Haq, Vice-Chairman, H&S Real Estate