How interest rates can affect your mortgage in the UAE

Buying a home is an exciting experience. Sourcing the best mortgage rates in the UAE is also key as you search for your dream home. With any loan comes interest / profit rates, so how you plan the property journey is crucial in ensuring you can manage your mortgage comfortably in the years ahead. Let’s take a closer look at how interest rates can affect your mortgage.

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 month or every 3 months. The reason for this is because a variable mortgage is linked to EIBOR.

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. 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 things more transparent, modern and 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.

Furthermore, since the UAE dirham is pegged to the US dollar, any movements in interest rates in the US by the Federal Reserve can also impact EIBOR, and therefore mortgage rates in the UAE.

The impact of EIBOR fluctuations will be felt first by those on variable rate mortgages or those on a revert rate, as these move based on EIBOR. For borrowers who are on a fixed rate mortgage, the impact of interest rate changes are generally unlikely to take effect until the end of the fixed rate period.

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