Outlook on Lending — by Brendan Kennelly

The much-anticipated increase in interest rates is now coming to fruition with three month EIBOR (Emirates Interbank Offer Rate) currently standing at 2.7%. This is an increase of 297% over recent years and a sharp incline can be seen in recent months given the US Fed’s decision earlier in the year to increase their base lending rate to a range of 1.5 – 1.75% and as of late this has further increased to 2.25%.

This is expected to increase further still in the coming years as the US economic outlook is anticipated to improve – one further rate increase is anticipated in 2018. There is no saying how high this could increase in the US, but the all-time peak over the last 20 years averaged at 5.73%. As long as the UAE Dirham is pegged to the US Dollar this will have a direct impact on mortgage rates here.

In line with the increase in interest rates on US Dollar, this past September the Central Bank of the UAE (CBUAE) also raised interest rates applied to the issuance of its Certificates of Deposits, which CBUAE issues to banks operating in the country –  this is the monetary policy instrument through which changes in interest rates are transmitted to the UAE banking system.

A number of banks have stopped offering fixed rates and now only offer EIBOR trackers with a fixed margin. This puts all the risk onto the consumer as the bank will still receive the fixed margin income and any fluctuation in EIBOR is borne by the client. It could be assumed that the banks deem this as a safer bet rather than offering fixed rates. What can seem an attractive rate at the moment may not seem so attractive in the near future if the increase in EIBOR continues on its current trajectory.

Meanwhile, a number of banks are sticking with their fixed rates which I’d personally recommend as it gives comfort that the payment will remain the same regardless of outside factors, some have in fact lowered their fixed rates which goes against the trend of other lenders. A two or three-year fixed rate is advisable and can be reviewed towards the end of the fixed term.

But there are now also offset mortgages available in the market, which can be taken by any client that qualifies but are generally taken up by self-employed consumers who can use surplus cash from their business to reduce interest costs on their mortgage.

Most banks allow for penalty-free overpayments which will accelerate the repayment of the mortgage and reduce interest costs. But those days may be over with the UAE Central Bank tripling the overpayment cap, from 1% to 3%, and removing the AED 10,000 overpayment cap altogether. Although another recent Central Bank circular has thrown more confusion over this as it seems to state that the Central Bank has reverted back to the old directive of 1% capped at AED 10,000, as always each bank has interpreted and applied this differently.

This uncertainty is very much a negative for consumers in my opinion, and potentially gives the banks too much leverage to overcharge clients than they had in the past.

A factor that should not be ignored is that as interest rates rise, affordability of mortgage finance reduces. Banks apply a stress rate of interest as part of the underwriting process and this is generally an addition of 2% onto any reversion rate, with affordability calculated at 50% of income. All financial commitments like car loans, personal loans, existing mortgages and 5% of any credit card limits are factored in. What is affordable from a bank’s point of view today might be quite different as rates rise.

Although it seems VAT hasn’t directly impacted property purchases, the cost of living has increased in the UAE and as such disposable income has reduced. Even so, it can be more cost effective to purchase a property and pay down your own mortgage rather than spending money on rent.

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This is even more relevant if clients have funds in cash sitting in the bank earning little or no return. The banks are still keen to lend and are offering competitive products to entice customers and business. These are regularly changing and we are being informed of these frequently.

It will be interesting to see what comes of the recent economic initiatives announcement that stated the Dubai Land Department will develop a mortgage and finance law, revitalise investment in the real estate sector, and attract foreign investment portfolios. I would expect this to be a positive development but we’ll have to wait and see.

 

 

By Brendan Kennelly
Senior Mortgage Consultant, mortgagefinder.ae

In just a few words, what would you say to buyers willing to take out a mortgage: The banks are still keen to lend and are offering competitive products to entice customers and business.

 

This article was originally published in Property Finder Trends, Vol 4. Click here to read the full report online or download the PDF.