Last month, the Central Bank of the UAE announced that interest rates would be cut by 25 basis points (bps) to 2.25%, this followed the rate cut decision from the US Federal Reserve that they would be cutting benchmark rates. These rate changes will have a direct effect on borrowing in the UAE – but how will they affect mortgages and is it good or bad news?
Different effects for different mortgages
There are various mortgage products available on the market and they will be affected differently by the rate cut depending on how they work and their terms and conditions.
We take a look at the main types of mortgage products, how they might be impacted and what affect this may have on your monthly mortgage payments. We also consider the effect it could have for new buyers looking to get a mortgage.
The positives and negatives of a fixed rate mortgage
First time buyers and those looking for long-term stability with their mortgage payments typically opt for fixed rate mortgages. The comfort that your monthly repayments will not change until the fixed rate period ends is a great security for many. The downside is if interest rates fall during the fixed rate period then there is no benefit as the rate cut will not be passed on, as in this instance.
Of course, fixed rate terms are not forever, and typically last only two or three years. Once it’s over, you’ll see the benefits of these rate cuts and the decision to take a new fixed rate or remain on the variable / floating rate can be made.
What about variable rate mortgages?
A variable rate mortgage has the potential to fluctuate, lining up with national trends driven by EIBOR (Emirates Inter Bank Offered Rate). Those on a variable rate face slight uncertainty of when it comes to their monthly mortgage payments – as interest rates increase so will their repayments. Likewise as interest rates decrease so can the monthly repayments.
In this instance, it is likely that those on a variable rate mortgage will feel some reduction in their monthly repayments. However, due to the nature of EIBOR and the way in which it is used in relation to mortgage repayments, it can take some time for interest rate adjustments from Central Bank to filter down to your monthly mortgage payments.
Beware the floor rate
Some lenders, however, apply a floor rate. This means that no matter what the EIBOR rate is, those lenders will never drop their interest below a certain point, known as the floor rate. This could mean that you won’t see as much of a decrease as those without a floor rate, or possibly no change at all if the interest rate for your mortgage sits at the floor rate already.
The default revert rates
When a fixed rate mortgage comes to an end, your bank will automatically move your mortgage onto a revert rate. A revert rate is, in most cases, a variable rate mortgage that will be influenced by EIBOR, as explained before. So if your fixed rate period has recently ended or is due to finish soon, this news is positive for you as it is likely you will benefit from a lower revert rate than previously available. However, it is important to note that revert rates can also have a floor rate, in the same way that variable mortgage products can.
We suggest considering a remortgage or buyout as the end of a fixed rate period approaches in order to get a better deal on your mortgage. Our team are able to assist with this.
How to take advantage of interest rate changes
The chances are that you budget your month ahead, with a portion of your income set aside for your monthly mortgage payments. Ask yourself the question, do I really need to pay less each month on the mortgage or could the difference be used to accelerate the mortgage repayment? It is a good idea to look at the long-term advantage of the lowered interest rates, rather than trying to gain in the short-term, and this means considering overpayments on your mortgage.
How do overpayments work?
Interest on your mortgage is calculated daily and charged each month based on your capital balance – and the faster you lower that balance, the quicker you repay your mortgage and the less interest you pay.
If you have some extra cash in the month – whether that comes from an interest rate drop in your favour, or even a salary increase or performance-based bonus – you can use that money to take a chunk out of your balance.
Check the terms and conditions of your mortgage to make sure there are no fees for making overpayments which could make such a move counterproductive, and get that capital balance down as fast as possible to make savings over the length of your mortgage.
How lower rates help new buyers
Mortgage lenders use a method of stress testing to determine if you are able to afford a mortgage – and those stress tests are heavily affected by things like interest rates. With the recent rate cut, this can make meeting the stress tests easier for some, which makes getting qualified for a mortgage more likely.
A lot goes into calculating mortgage eligibility, but why not take advantage of this latest decision by the Central Bank of the UAE and apply for a mortgage to buy that property you you have been wanting!
Help from Mortgage Finder
Our expert team are able to help with a wide range of mortgage products for those looking to purchase a property in Dubai and across the UAE. Mortgage Finder is perfectly placed to find the right mortgage to suit you. Use our contact form or simply pick up the phone and call us today to have one of our professional advisors help you through the process.