UAE homebuyers opt for fixed-rate mortgages to offset rising costs

Demand is also rising to refinance variable rate mortgages with fixed lending rates, experts say

Dubai Creek. Demand for fixed-rate mortgages has risen significantly as homeowners look for security and consistency in their mortgage payments amid higher borrowing costs. AFP

Shweta Wahi, a Canadian-Indian resident of Dubai, took out a mortgage worth Dh2 million ($544,588) about a year ago from Abu Dhabi Commercial Bank to buy her family’s first home — a four-bedroom villa in Emaar’s Dubai Hills — on the secondary market.

Ms Wahi, who works as a director of operations at Curtin University in Dubai, opted for a fixed-rate mortgage, in which the rate is locked in for three years before moving to a variable rate.

Her choice reflects a wider market trend in the UAE, with demand for fixed-rate mortgages rising significantly as homeowners seek security and consistency in their mortgage payments amid global economic instability and higher borrowing costs, as central banks raise interest rates to rein in inflation.

“My husband and I had been renting for the first few years of our marriage, because we were not in a position to buy at the time and we weren’t sure of our finances,” she says.

“Deciding to buy was a result of growing the family and wanting to deepen our roots in the country as we have been here for the better part of the last three decades and our parents have been here much longer.

“It made sense for us to buy rather than rent, and our equated monthly instalments are now working out to what we would have spent on rent anyway.”

Consumers are paying more to borrow money after the UAE Central Bank increased base rates nine consecutive times over the past year.

Last month, the regulator increased its base rate for the overnight deposit facility by a quarter of a percentage point to 4.9 per cent, from 4.4 per cent.

As people come to the end of their fixed-rate mortgages and enter the variable market during a period of an increasing Emirates Interbank Offered Rate (Eibor), they are suddenly hit with payments that are much higher than expected, experts say.

Despite the interest rate rises, the UAE’s real estate market is continuing to rebound strongly from the coronavirus pandemic on the back of government initiatives, higher oil prices and other measures to support the economy.

The average asking price for apartments in Dubai surged by 25 per cent annually in the first quarter of 2023, while villa prices rose 16 per cent in the three-month period, the Dubai Media Office said last week.

Buying a home can be an emotional process, says Ms Wahi, who is in her early 30s.

“If you’re the average Joe who isn’t dealing with finance-related matters daily, this process can be daunting, so it’s best to ask as many questions as you can — even if they seem to have obvious answers,” she says.

“Don’t leave anything to assumption. It’s best to ask for upfront charges, regardless of whether you’re dealing with a broker or directly with the bank.”

Ms Wahi's mortgage is with the same bank that has her salary account to make the process easy.

It doesn't hurt to start researching, even if you aren’t immediately looking to buy. Find a broker or banker you can build a relationship with and keep an eye on the market, she says.

However, there are a number of costs buyers must account for, she warns.

“Broker fees, Dubai Land Department charges, valuation fees, processing fees. There’s also an insurance plan you need to take once your mortgage comes through,” she explains.

“Brokers and banks are very helpful to walk you through the entire process. The actual loan amount you can get is a multiple of your monthly salary, and salaried individuals are better placed to get a pre-approval for a loan than business owners.

“Do the math and take your time with it.”

Meanwhile, Mortgage Finder recorded a 20 per cent growth in mortgage application volume in the first quarter of 2023, compared with the same period last year.

Similarly, mortgage broker Holo registered a 286 per cent increase in business in the three months to the end of March, compared with the same period last year.

“Fixed rates are by far more popular among our borrowers today as people are aiming to stabilise their housing cost, particularly during a period of global economic uncertainty,” says Mohamad Kaswani, managing director of Mortgage Finder.

“There are still a number of offers for fixed rates below 5 per cent in the market. But rates today are nearly double what they were in the first quarter of last year.

“There are a number of offers currently for three-year and five-year fixed mortgage products below 5 per cent.”

The average rate a person can expect to pay is about 5.2 per cent, says Thomas McLaughlin, UAE country manager at Holo.

There are still deals available such as the “market-leading five-year fixed rate at 4.99 per cent”, he adds.

If you compare rates available now to those from this time last year, rates have increased by about 2.5 per cent for five years fixed, Mr McLaughlin adds.

First-time homebuyers continue to represent the largest percentage of borrowers at Mortgage Finder, while people from India, the UK and the UAE are the top nationalities looking to buy.

Interest in refinancing a mortgage has also nearly doubled compared with the same period last year, says Mr Kaswani.

Prior to the consecutive rate increases that started on March 22 last year, many borrowers in the UAE were choosing very low variable rate products at below 2 per cent, he says.

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Most of the mortgages that originated early in 2022 are now readjusting to higher rates, which is driving borrowers to stabilise their housing costs by refinancing, he adds.

Holo has also seen an increase in buyout enquiries.

However, Mr McLaughlin warns that borrowers should be aware that there are also fees involved when switching to another mortgage.

The mortgage industry has witnessed robust growth in the past 12 months, even with numerous rate increases from banks, says Dhiren Gupta, managing director of 4C Mortgage Consultancy.

“The Central Bank of the UAE is able to diligently manage the federal rate increase in US markets by keeping a control on Eibor hikes, which has shaken the interest rates in the banking industry,” Mr Gupta says.

“However, this has not discouraged mortgage buyers from entering the market due to high demand for UAE real estate.

“With resale and handover properties in high demand, this has kept the mortgage industry upbeat. Moreover, there is also demand to refinance variable or floating rate mortgages with fixed lending rates.”

Currently, fixed mortgage lending rates are hovering between 4.75 per cent and 5.99 per cent for two to five-year terms, according to 4C Mortgage Consultancy.

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Before the UAE Central Bank started raising Eibor rates in March 2022, mortgages ranged from 2.49 per cent to 3.99 per cent, the consultancy’s data shows.

Mortgage rates reached their highest level in 2008-2009, rising to about 7.75 per cent to 8.5 per cent.

“The current best mortgage fixed rates start from 3.99 per cent fixed for two years for salaried profile and 4.99 per cent fixed for three to five years for self-employed professionals,” Mr Gupta says.

Demand for townhouses and villas has grown significantly since the pandemic. But demand for apartments also kept up the momentum due to competitive pricing, more availability and several handover payments due, says Mr Gupta.

“We have witnessed demand from many first-time home owners who recently migrated to the UAE, while existing mortgage owners have picked bigger units,” he says.

“Emiratis are also seeking mortgage support for their large villas and residential buildings.”

A majority of Holo’s customers are looking to buy at a price point of Dh1.5 million or below, says Mr McLaughlin.

“Overall, our average loan size has increased. Expat first-time buyers or those re-entering the market make up the bulk of our enquiries,” he says.

VH, who did not want to use her full name for confidentiality reasons, recently took out a variable rate mortgage worth Dh550,000 to buy an apartment in Dubai.

The corporate communications professional believes a variable rate is better suited to her situation as her monthly mortgage payments are about Dh3,300 per month, so she can afford an increase.

“But I am also keen on profiting from variable rates when they go down, which I have been told they most likely will towards the end of the year or next year,” she says.

“It was a good decision because the Dh3,300 that I pay monthly for my mortgage EMI plus services charges and Dewa cost me slightly less than what I was paying as rent, but at least this goes towards having my very own place.”

Do not be afraid to negotiate with banks, she suggests. Another thing to be mindful of is how secure you feel in your job in the UAE, as mortgage terms and conditions might change depending on your visa status, she adds.

She also recommends obtaining four to five pre-approvals from different banks because they are free and will offer a better idea when comparing rates as these will already be tailored to your individual situation.

“However, when getting pre-approval, ask the bank if pre-approval will only be sought for a mortgage or also a credit card because sometimes banks use the same application process and ‘credit card application in process' will then show and affect your credit rating,” VH warns.