The Impact of Rising Interest Rates

The question we are consistently asked when discussing mortgages with our clients is, what is going to happen to interest rates? When making a decision to buy, the monthly cost is a major consideration and clearly the interest rate will have an impact. Nobody has a crystal ball but what is safe to say; UAE interest rates have been going up and will continue to increase, over the short-term.

Why have rates been going up and why will they continue to increase? The simple answer is the US Federal Reserve is on an interest rate hiking cycle which has a direct impact on the interest rates in the UAE. Why do the rates in the US have an impact in the UAE?  As the UAE have become increasingly more international in their financial affairs, this has led to both a decrease in interest rates (over the past 10 years) but also a closer relationship with global interest rates (predominantly affected by US). We can see now that the relationship between EIBOR (Emirates Inter Bank Offered Rate) and the US Federal Reserve rate (Fed Funds) is almost perfectly correlated. The US Fed has raised their interest rates by 1% since December 2015 and in the same period 3-month EIBOR has moved from 1.05% to 2.1% (an increase of 1.05%).

What does this mean for UAE mortgage rates? In the short term, banks have been willing to reduce margins to keep mortgage rates attractive. In 2015 there were several lenders offering 2.99% for 2 years and even as low as 2.49% on a 1 year basis. There are still major lenders in the market offering rates between 3.24% – 3.49% for 2 years. It would appear, the appetite to lend even at lower profit margins remains strong. In the long-term, if interest rates continue to rise as expected, then invariably mortgage rates will have to increase. The expectation is for the US Fed to raise rates by another 1% over the course of the next 12 months and therefore, it is fair to expect a similar increase in UAE EIBOR interest rates.

What impact will this have on my mortgage or future mortgage payments? At the moment if you purchase a 3 bed villa in a desirable location, such as Arabian Ranches, you might expect to pay around AED 3 million. The mortgage cost at current rates would be approximately AED 155k per year based on current rates (over 20 years). To rent the same property would be in the region of AED 170k per year. If you take into account a 1% increase in interest rates, the mortgage cost would increase to AED 170k per year. Rental rates are at their lowest for several years and even with an interest rate increase, the annual cost would remain similar as taking a mortgage.  The majority of mortgages in the UAE are on a capital repayment basis, so you are paying into your capital from your first payment. If rates increase by 1% based on AED 170k annual mortgage payment, you would be paying approximately AED 70k off your loan amount in the first year. That is AED 70k towards your own property rather than into your landlord’s pocket.

As such there is still a compelling reason to buy despite the expected increase in interest rates. This is especially true if you have a view to staying in the UAE for at least the next 3 years. What is most important is you take a mortgage that puts you in the best position. There are two possible ways to achieve this goal. Number 1, get a fixed rate for the longest term at the lowest rate. At the moment many lenders are not willing to lend with fixed rates more than 2 years at rates below 4%. Number 2, if you don’t go fixed then the best option is to go for a variable rate with the lowest possible fixed margin. Although your rate will still vary with the market, it will happen gradually and your rate will always be in line with the latest mortgage offers.

In summary, there may be some short term increases in mortgage rates, however the economic reasons to buy versus rent are still compelling, especially if you are planning to stay in the UAE long-term. Home Matters have the best mortgage options in the market to suit your individual requirements and circumstances. Contact us on 800 MORTGAGE for a free consultation.


Written by Daniel Le Moeligou, Director – Sales & Marketing 

Published in EspaceXTRA Vol 18

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