mortgage
More banks in the UAE are offering deals on their existing mortgage loans, passing on the recent cut in interest rates to the customers. Image Credit: Supplied photo

If you are a home owner in the UAE with an existing mortgage, this is an optimal time to refinance your home loan and get a better deal. With the UAE dirham pegged to the US dollar, interest rate cuts by the Federal Reserve always have a bearing on borrowers locally. Following recent interest rate cuts, mortgage rates in the UAE are at historic lows, say mortgage industry sources.

In the current circumstances, banks are offering extremely attractive interest rates for borrowers looking to refinance their mortgage. This, coupled with the removal of the 3 per cent early settlement fee by the UAE Central Bank in October 2019 makes refinancing a great option for many homeowners.

“This is a good time to be refinancing your mortgage. One bank is offering 2.75 percent interest rate for the first year on a mortgage while some others are offering 2.99 percent for three years or five years. One bank is even offering an aggressive fixed rate of 3.99 percent for 10 years. These are historically the best rates in the UAE mortgage industry,” said Dhiren Gupta, Managing Director, 4C Mortgage Consultancy.

These are historically the best rates in the UAE mortgage industry

- Dhiren Gupta, Managing Director, 4C Mortgage Consultancy

What’s the prevailing mortgage interest rate?

The average interest rate for mortgages in the UAE currently ranges between 3.49 per cent to 3.75 per cent. These rates are available for a new mortgage as well as refinance (or buyout) transactions.

3.49%


Current average mortgage interest rate in the UAE

A mortgage cycle is usually a combination of a fixed rate and a variable rate. Banks usually offer a fixed rate for the first three or five years. Once the fixed rate expires, customers should check the prevailing interest rate in the market and negotiate with the lender for better terms or opt for a refinance transaction. Although banks will try to retain customers, the borrower has to be educated enough to see whether they benefit in the long term and derive cost savings by switching lenders. In most cases, it makes sense to switch lenders.

“Most mortgage products in the UAE are based on the 3-month EIBOR [Emirates Interbank Offered Rate]. According to UAE Central Bank data, the 3-month EIBOR has gone down from 2.85 percent a year ago to 1.5 per cent today. Based on the 1.5 per cent average fixed margin charged by most mortgage providers, the average interest rate on variable-rate mortgages has gone down from 4.35 percent a year ago to 3 per cent today. The last time we witnessed such low interest rates on mortgages was back in 2015,” explained Ambareen Musa, CEO and founder, Souqalmal.com.

The last time we witnessed such low interest rates on mortgages was back in 2015

- Ambareen Musa, CEO and founder, Souqalmal.com

Banks offer incentives to poach customers

Apart from the low rates offered on variable-rate mortgages, banks are also providing lower interest rates on their fixed rate mortgages. Some banks are throwing in other incentives such as inclusion of broker fees and Dubai Land Department fees within the finance amount, as well as discounts on processing fees and valuation fees.

“Interestingly, many banks are now offering to waive all pre-approval, processing and valuation fees when you refinance your mortgage with them. A few others are also offering a refund of the early settlement fees,” Musa added.

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Some banks are throwing in incentives such as inclusion of broker fees and Dubai Land Department fees within the finance amount. Image Credit: Stock photo

Variable vs. fixed rate?

In the current market where you have to be careful of your cash flow, it is advisable to opt for a fixed rate for three to five years since you can be certain of your monthly mortgage instalments. This way, you can be certain that your mortgage payment will be a controlled component in your cash flow. “With variable rates, the bank’s profit margins are higher and the interest rates are linked to either a 3-month EIBOR or 6-month EIBOR. This means your monthly instalments will be revised every quarter,” warned Gupta.

When refinancing, we generally suggest that clients opt for a fixed rate mortgage as it gives more stability over a period of time

- Warren Philliskirk, Director at Mortgage Finder

According to Warren Philliskirk, Director at Mortgage Finder: “When refinancing, we generally suggest that clients opt for a fixed rate mortgage as it gives more stability over a period of time. It allows clients to better plan their finances and future. Further, in most cases, fixed rate products offer the best features and rates available in the market.”

Who benefits from refinancing?

Usually, end-users who occupy the property tend to benefit more from mortgage refinancing since they have longer use of the property and will thus offset any costs incurred while switching loans in the long term.

“The cost benefits vary greatly from one client to the next as it is fully based on individual circumstances. The most obvious case for refinancing would be if you are out of the fixed term period and on a high reversion rate, with a low outstanding mortgage amount, then it could be of huge benefit to investigate refinancing,” Philliskirk pointed out.

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Given the low numbers of new mortgage transactions on the secondary market, most UAE banks are willing to negotiate with existing customers on their reversion rates. However, in many instances, even if the bank makes an offer, it will not be the best deal on the market.

“The amounts by which banks are willing to reduce are generally not as low as the new rates available in the market. This means it is important to calculate what the bank is offering and weigh this up against refinance options from other banks to see what works best financially,” suggested Philliskirk.

Fees to watch out for

In October last year, the UAE Central Bank removed the 3 percent early settlement fee that lenders charged customers when exiting a mortgage early, which included refinancing and buyouts. Instead, the fee now stands at just 1 percent of the outstanding mortgage amount or AED 10,000, whichever is less.

1%


Of outstanding mortgage amount must be paid as early settlement fee

Customers must also pay the Dubai Land Department’s mortgage registration fee of 0.25 percent and a property valuation fee of Dh2,000 to Dh3,000.

According to Mortgage Finder, a mortgage refinance costs approximately Dh20,000 in the region.

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The mortgage early settlement fee now stands at just 1 percent of the outstanding amount or AED 10,000, whichever is less. Image Credit: Stock photo

Equity release: A good option?

Equity release is when a buyer who has paid full cash for their property approaches a bank to take out a mortgage. This helps you unlock the cash locked up in your home equity. There are many reasons that borrowers might release equity, for example, to make home improvements or fund further investment in property.

As per current guidelines from the Central Bank of UAE, funds secured from an equity release can only be used for the refurbishment of the same property or utilised to purchase another property in the UAE. However, owing to their current financial status, most banks have constraints in providing equity release for current property owners.

“The Central Bank had released guidelines on equity release transactions in Q4 2019 which restrict these funds from being used for general debt consolidation, such as settling your car loan, personal loan or credit card dues. Instead, you are encouraged to only use this cash to refurbish or improve your existing home or buy a new property,” observed Gupta.

Customers must know that the interest rates for an equity release are higher when compared to taking out a fresh mortgage or a buyout transaction.

Equity release may not be a viable route for everyone. Those who have lost their job or have received a pay cut may not qualify at all

- Ambareen Musa, CEO and founder, Souqalmal.com

“Equity release may not be a viable route for everyone. Those who have lost their job or have received a pay cut may not qualify at all. Further, your property value could have deteriorated in the current economic conditions, so a new home valuation by the bank may result in you having access to a lower finance amount, even at a higher loan to value,” added Musa.