Plan ahead for rising rates

Rock-bottom interest rates have rewarded mortgagors over the past few years, but the tide appears to be shifting. The US Federal Reserve adjusted interest rates from 0.75 to 1 per cent in March.

The dirham’s peg to the US dollar means that any change in US rates directly influences UAE interest rates. A hike may be forthcoming but it’s hard to predict the timing.

Market estimates anticipate rates will rise to 2 per cent next year and 3 per cent in 2019. However, this may not immediately impact property buyers’ cash flows as UAE banks continue to stabilise borrowing rates and remain optimistic on the nation’s economic growth.

Soon after the March Fed announcement, the UAE Central Bank in turn revised rates applicable to certificates of deposit by 25 basis points, the impact of which is now likely to trickle down to existing or potential loan borrowers.

Currently, a few banks offer an initial fixed interest rate starting at 3.25 per cent, up from 2.99 per cent earlier. Consequently, existing mortgage buyers on a variable rate may see a small hike in rates.

While emerging interest rates could make repayments marginally expensive or increase the cost of borrowing, on the other hand, you can realise an increase in the return on your savings. So if you have or are planning to take on debt, now is the perfect time to prepare yourself for the shift. With the rising interest rate environment, you have a strong profit margin ratio. Here are some essential points to keep in mind.

Cut back on spending, maintain affordability,amend your wish list and look for ways to boost your bank balance. A little preparation could help you discover savings to cover the impact of rising interest rates.

Certainly, it pays when borrowers compare interest rates from different providers on regular basis and lock-in an attractive rate. As of now UAE mortgage interest rates are in the range of 3-5 per cent. With rates likely to rise, it’s the right time to look for ones that are favourable over the long term, as a little difference in the rate can have a substantial
effect on the savings.

If you have enough to pay more than the monthly minimum, consider overpaying. This strategy can reduce the term or size of future instalments and build a financial shield while reducing debt burden. It also eases the interestamount on the outstanding mortgage value.
A word of caution: do identify what penalties and fees may apply — this varies by lender — and if they nullify any savings. Some lenders will let borrowers overpay 20-30 per cent a year without a prepayment penalty.

Consider switching or rescheduling your loan if you find the interest rate higher than those available in the market. By shopping around you can save thousands each month, and now is the time to review your mortgage and look for an enhanced deal. A mortgage consultant could advise on all the fees associated with re-mortgage.

Set up a rainy day fund and abide by what you can afford and save habitually. A good rule of thumb is to have three to six months' crucial expenses accessible in a stress-free savings account. Moreover, returns on investments are likely to increase with the hike in the interest rate, which will give a higher return on any reserves, so be disciplined and keep saving.
— The writer is Managing Director at 4C Mortgage Consultancy