The 11 interest rate hikes since March 2022 had a telling impact on UAE property owners with mortgages to pay off. For those on variable rates, the EMIs have been quite steep. Image Credit: Shutterstock

Dubai: Mortgage lending rates in the UAE should drop at some point in 2024 – but that shouldn’t mean property owners with home loans to pay off should be in a rush to refinance.

Because if they get their calculations wrong, any such refinancing could come at a steep cost. So, who should aim for a refinance as and when interest rate cuts happen next year?

“We have seen many home buyers who had taken variable rates and as a result are paying as high as 8 per cent,” said Michael Hunter, CEO of the mortgage advisory portal Holo.

“(Any property owner) in this scenario would be advised to seek a better option. Staying on a variable rate - and waiting for rates to come down - may take a few years before it becomes viable again.” (Refinancing is about reworking the terms and conditions on an existing loan or mortgage, typically to make use of favourable interest rate movements. Of course, it can also be done when the borrower faces issues on meeting his obligations.)   

Crunch time for end-users – and investors

Timing their refinancing move right could mean saving tens of thousands (or more) of what homeowners would be paying as mortgage.

For many home buyers in the UAE who bought during 2019-2021 on mortgages, they would have shifted from fixed rate terms to variable at some point during this year. UAE mortgage lenders typically offer 1-3 fixed rate terms.

With the US Federal Reserve having effected 11 rate increases since March 2022, and mirrored by the UAE Central Bank, it immediately meant that home owners had to pay more on their EMIs.

Some property buyers have found it extremely tough to cough up the higher payment obligations. “After the 11 rate increases, I am paying more than Dh3,000 on the 2-bedroom apartment,” said one investor in JLT who bought a ready unit in 2018. “The only thing that helped me meet the EMI was getting a higher rent, but there are other property costs that have gone up and which means I am paying out of pocket. I am seriously thinking of a refinance the moment an interest rate cut happens”

US rate hikes and UAE mortgages
Since March 2022, there have been 11 rate hikes by the US Federal Reserve, and which was immediately effected by the UAE Central Bank (given the dollar-dirham peg). As an extension, the rate increases would rub off on mortgage rates and the terms attached to the payments.

It’s handover time

Next year will see a surge in property handovers across locations in the UAE, which is when mortgages come into play on offfplan buys. The way a mortgage is structured these days, lenders give that 1-3 year (or even up to 5 year) fixed rate option.

Currently, fixed rate mortgage loans start from 4.99 per cent, which are ‘more in line with previous levels’. But lenders will insist on salary transfers and other conditions to be eligible.

Variable rates are much higher, ranging from 6 per cent.

“Handovers can look very different from each other, depending on how much is due once the property owner takes delivery,” said Hunter.

“It could be 80 per cent payment due to developer or as low as 10 per cent. What we can say is if you are expecting handover of the property, start your mortgage research at least 30 days before to avoid any late payment penalties from the developer.”

But what of property owners who are currently on fixed-rates with their mortgages? Should they seek a refinance once the Fed cuts start?

“We would always advise depending on the customer profile,” said Hunter, “If they are adverse to risk, it would be advisable to still fix your rate for longer.”

Property owners can get variable rates fixed for 6 months, known as '6 month EIBOR'. It is not widely used

- Michael Hunter of Holo

Refinance costs can be steep

“To refinance in the UAE even while in a fixed rate term, it’s 1 per cent (and capped at a maximum of Dh10,000,” he added.

“A 1-year fixed term does not always offer the best rates and on occasions 2-3 year fixed may be cheaper.

“It is predicted interest rates may drop by 0.75 per cent next year in the US, which indicates there could be two rate drops next year. It is advisable to keep an eye on these movements if you already have a mortgage in the UAE.”

The bottom-line for property owners? Hit the calculator and work out all the pros and cons before talking to the bank - or another - before resetting those mortgage obligations.

Because it's never a straight line between an interest rate cut and for that to translate on the EMIs...