How interest rates can affect your mortgage in the UAE

Purchasing any type of residential property is usually an exciting experience. Sourcing the best mortgage rates in the UAE is key however, as you search for your dream home. With any loan comes interest / profit, so how you plan the property journey is crucial in ensuring you can manage your mortgage comfortably in the years ahead. And be honest – property is perhaps the most important purchase undertaken in life. Let’s take a much closer look.

Mortgages available in the UAE

  • A fixed rate mortgage is a product whereby the interest rate will remain the same for a certain period of time. Following this fixed period, the interest rate will then change to a revert rate.
  • A variable mortgage is the opposite in the sense that interest charged on the home loan can fluctuate every few months. The reason for this is because a variable mortgage is linked to EIBOR.
  • A discounted/introductory offer rate mortgage will see the provision of finances on a standard variable rate for a short period of time – you’ll find this type of product presented as an introductory offer.

Of all these products the variable mortgage plays a more colourful role simply because of its fluctuations, as it’s tied to a fiscal stability tool in the UAE known as ‘EIBOR’. This will have a direct effect on your mortgage for the length of its tenure. So, making yourself aware of how the system works is really important.

Paying more for a home will leave less disposable income in the long run and vice versa. Before beginning the mortgage process it’s advisable to speak with a mortgage advisor to give you a good idea of the payments on the loan.

What is EIBOR?

EIBOR, or Emirates Interbank Offered Rate, is the interest rate charged by banks in the UAE for interbank transactions. When one bank needs money, it will often borrow from another’s excess funds. This second bank will profit from the transaction. But to maintain stability in the market, the rate at which the second bank lends to the first is based on EIBOR. Make no mistake however, EIBOR also has a direct influence on UAE mortgage rates. Most banks will clearly state their variable mortgage rate is based on EIBOR.

Setting the rate

The rate is set by the UAE Central Bank and published each business day on its website by late morning. Until recently It was calculated as an average of 10 UAE banks who submitted their daily rates, with the two highest and two lowest removed, and an average taken of the remaining rates.

This all changed in 2018 with the advent of a new more dynamic system. Bilal Khan, Dubai-based senior economist at the emerging market specialist bank Standard Chartered said. “We see it in the context of the move globally, in terms of setting benchmark rates, regulators are moving to an area instead of banks giving an approximate of what they think but based on actual transactions. In that way I think it just increases transparency around benchmark interest rates.”

So now, a panel of banks contribute to EIBOR and the rate is based on Reuters’ methodology procedures aligned to the International Organisation of Securities Commission Principles for Financial Benchmarks. In other words, the new system is designed to make quotes more transparent also ensuring banks use the same criteria for their quotes. It’s modern and much fairer.

How will it affect my mortgage?

EIBOR forms an important benchmark for lenders when it comes to financial transactions, loans and in particular – mortgages. Any movements are passed on, so if it goes up people will see a rise in their monthly payments. If it goes down, this likewise will be passed on.

Encouraging reporting

The National recently reported The US Federal Reserve’s decision to hold interest rates steady and abandon plans to make any increases this year, was a clear indication its three-year campaign to normalise monetary policy might be at an end.

The US central bank held its benchmark rate between 2.25 and 2.5 per cent revising down expectations for headline inflation and economic growth this year. As the UAE dirham is pegged to the greenback, experts said this is “good news” for UAE consumers and businesses as borrowing costs will remain unchanged.

A good time to search

For those worried interest rates would face hikes in 2019, this news provided a great sense of relief all round. And with nothing significant expected to happen until 2020, this could also provide a real window of opportunity for those currently getting a mortgage in Dubai or searching for the lowest mortgage rates in UAE.

At Mortgage Finder, our mortgage consultants are able to help you find the best mortgage rates for your situation. They will search our panel of over 20 banks in the UAE to find the best product for you and provide unbiased, professional advice.

By Brendan Kennelly, Senior Mortgage Advisor at Mortgage Finder

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