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In 2022, the global economy faces several serious challenges at once, endangering the very foundation of its operation. One of these challenges is inflation, whose historically high growth rates threaten the production and markets of the majority of the world's countries.
Raising interest rates on loans, particularly on mortgages, is one of the key strategies used by several state authorities to deal with inflation. The logic behind such moves is to make borrowing money more expensive, which will lower the options available to the average consumers to fund their purchases. And this will reduce the demand for goods globally and cause a slowdown in their production.
The employment of this inflation-fighting tool is approached differently in various countries, but even in this example, the UAE’s method seems unique. The US economy and the economy of the United Arab Emirates are closely connected. As a result, a number of economic indicators are linked to those in the US economy. To start, this is about the currency exchange rate (United Arab Emirates dirhams, AED) and the key lending rate.
Content:
- The key rate in the UAE and its connection with the actions of the US Reserve System
- Attempt to compensate growing interest rates
- Expectations for those with open mortgages
- Interest rates on new loans
- Options for buyers
The key rate in the UAE and its connection with the actions of the US Reserve System
The Central Bank of the United Arab Emirates follows the key rate changes made by the US Federal Reserve, whether they be increases or decreases. Although the size of the rate does not match the 1 to 1 rate in the United States, the general direction of the movement is still the same. The Fed has raised the interest rate five times in the eight months since it began raising rates in March 2022. The most recent increase, +0.75% in September, was the third consecutive increase. In the UAE, the key lending rate reached 4.5% as a result of seven rises as the Central Bank of the country followed the US Central Bank’s lead.
Some market players, however, are not satisfied with the current situation. This is especially true for the United Arab Emirates’ real estate industry, which is one of the main driving forces of the country's economy. The Dubai market has a lot of wealthy purchasers, but market players, real estate developers in particular, cannot rely only on them. The sector needs a vast consumer base, consisting of people with different levels of income and savings, including modest savings.
Ordinary home buyers are scared away by high interest rates, which make mortgage financing for real estate purchases in the country less and less affordable. As a result, developers are forced to find a way to offset the negative. The main tool used by the companies was the offering of more diverse and flexible payment options for both transactions involving off-plan real estate and ready-made real estate that has been bought directly from the developer.
Attempt to compensate growing interest rates
Returning to the relatively outdated concept of purchase contracts with 1%-per-month payment plans has become the standard practice among developers. These offers first appeared on the Dubai market a few months ago and have become very popular since then.
These results encouraged the construction sector to make the decision to experiment with lower payments. The least expensive option available right now is 0.8% of the trade amount that should be paid monthly. It applies to real estate that is currently under construction and costs 326,000 USD with a 7-year payment schedule.
Market experts predict the expansion of these practices, longer payment terms, and lower interest rates. Even relatively expensive transactions with developers are more profitable right now than attempting to obtain a mortgage.
Expectations for those with open mortgages
For individuals who only intend to purchase real estate, the decision is essentially clear-cut. However, for those who already have mortgage loans, the dilemma emerges of what to do in a new circumstance.
In fact, many banks in the United Arab Emirates are currently quite easy on refinancing requests, as well as on purchasing other people’s mortgages, offering terms with appropriate prices. But in these situations, the issue of selecting a “Lock-in” term arises when the borrower on a mortgage loan will not be able to refinance it.
Banks in the UAE now provide periods ranging from a year to a year and a half. At the same time, the borrower should aim for a 5-year fixed-rate loan period. This will ensure protection from future growth of the key rate. This, however, is not a win-win situation because there is no guarantee that the current state of high interest rates on loans will continue indefinitely. Some customers may discover that even though the credit market has already shifted toward reduced interest rates on repayments, they still have to continue paying high interest on their loans.
Refinancing
The current cost of refinancing is about 1%, or 10,000 AED. It is usually paid by the new lender and added to the loan amount. There are some fees that will need to be covered. For example, in Dubai, borrowers will have to pay:
- Loan appraisal fee — 680-820 USD excluding VAT;
- Mortgage registration fee — 350 USD + 0.25% of new loan amount (note: for Dubai Land Department);
- Trustee's fee — 1,145 USD;
- The fee for the issuance of a new title document — 160 USD;
- Although the majority of banks do not require the payment of transaction fees, it is possible that this will occur; in this case, the payment amount will be determined on an individual basis.
Interest rates on new loans
Getting back to bank interest rates. For one year, three years, and five years, respectively, the major offers are fixed at 3.49%, 3.99%, and 4.49%. Moreover, there are EIBOR-linked floating rate mortgages that start at 0.49%.
In the current situation, experts recommend repaying loans as soon as possible. Banks in the United Arab Emirates frequently give customers the option of 20–30% early repayment. Further early payments come with a 1% surcharge of the funds paid.
Options for buyers
As you can see, it is not difficult to understand the advantages for the typical customer while deciding between mortgages and brand-new payment plans from property developers. The Federal Reserve intends to raise the key rate by at least 1% before the end of this year. However, it is unclear when the increase will stop.
In fact, since 2008, the rate has already reached a record high; by the start of 2023, it should reach 4%. The Fed plans to increase the rate to at least 4.6% in 2023. The Central Bank of the UAE will follow this movement. The financial market is in an unstable situation, and the world economy is experiencing turbulence.
Using your own funds and new plans may be more expensive in the short run, but much safer than loans in the long run.
