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UAE interest rate hike: Property owners to lock mortgage rates

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Dubai: Interest rates are higher by 0.50 per cent – and the one thing UAE’s property buyers seeking mortgages should do is try to lock in their financing rates for a longer period. This represents the best option for them to offset the higher cost of home finance, which will see further hikes through the year.

The half-a-percentage hike on Wednesday (May 3) would reflect on mortgage rates by between 1-1.5 basis points across lenders. “This means, for every Dh500,000 borrowed, it could cost an additional Dh5,000 per year,” said Michael Hunter, co-founder of Holo, the online mortgage platform. However, it’s not all bad news – locking in a long-term fixed rate of three- to five years at a lower interest rate - while rates remain low - could mitigate the risk of fluctuation in expenditure. And likely ride out the high-interest rate period.

This is the second increase since March, when the Fed hiked its base rate by 0.25 per cent and also indicated more ‘aggressive’ increases ahead. Wednesday’s rise sure qualifies as being in the ‘aggressive’ range.

Locking in does have its downside – Lenders offer fixed-rate periods for up to five years, however, fixing over a longer period means it’s likely the interest rate will be higher. This is because the lender is making assumptions that over a set period, they will not make a loss on their costs.

Switch mortgage lender?

Mortgage borrowers could also consider changing to another bank if this means getting a more favorable lending rate. Those considering purchasing a property in the UAE at a higher rate can be assured that they will be able to change lenders in future. The UAE Central Bank rules mean that if you wish to make the switch, a maximum exit penalty of 1 per cent will be applied - but this is capped at Dh10,000.

A mortgage rate will only be locked in once the lender books the loan. Therefore, if you are considering switching lenders, act now to take advantage.

Drop in mortgage buyers

In the first three months of this year, mortgage-backed home purchases in Dubai declined compared with a year ago. This also means that the Dubai property market is attracting more instant cash buyers, more so after the start of hostilities in Ukraine. A sizable percentage of the new buyers are from Europe, according to market data.

For the UAE property market to retain the momentum from 2021, there will need to be a steady entry of more end-users thinking of home ownership. Right now, they are confronted with two outcomes – and neither are favorable. For one, property values are steadily rising, with the average transaction value for an off plan property during Q1-2022 being 16.90 per cent higher than what it was last year. For a ready apartment, the rise in average transaction value is closer to 20 - 30 per cent.

Mind your expenses

Borrowers in the UAE need to keep other details in mind, not least their monthly expenses as a percentage of their income. Because the earnings-to-salary (ESR) ratio will be tacked along all other borrower info by Al Etihad Credit Bureau, to help banks have a better reading on credit profiles. For end-users wanting to take out home finance, they will need to keep on the right side of all these scores.

According to developers, the US Fed’s insistence on multiple rate hikes will propel end-users to make up their minds soon about buying a home. If they are thinking of mortgages, there is no reason why they should wait and then have to pay extra as more rate hikes come in. On our part, we can keep the down payments lower, provide more incentives such as fee waivers, and even offer direct financing.

But those decisions need to come fast.

Source: Gulf News