UAE Central Bank seeks measures to limit impact of interest rate rises on home loans

Banks asked to bear the remaining uncovered interest for loans of UAE nationals

The Central Bank building. Photo: Central Bank of the UAE

The UAE Central Bank has issued a notice to all banks and finance companies in the Emirates to outline the measures they have taken to reduce the burden of higher interest rates on home loans for UAE citizens.

The measures, which came into effect on July 1, cover all residential real estate loans for non-investment properties, including loans with increased debt-burden ratios, where banks have not postponed any of the interest payments until after repayment, according to a statement from the banking regulator on Tuesday.

It is also applicable to loans with lower DBRs where banks have postponed the interest incurred as a result of higher interest rates, it said.

Debt-burden ratio is the ratio of a customer's total monthly outgoing payments (including instalments towards loans and credit cards), to their total income.

For customers with a monthly income of Dh40,000 or more, banks are permitted to exceed the rate of deduction from the salary specified in the regulations, currently set at 50 per cent up to a maximum of 60 per cent, provided that the financial institution bears the remaining uncovered interest as a result of the increase in interest rates, the UAE Central Bank said.

“This essentially exempts customers from the remaining interest with no extension of the tenor,” the regulator said.

“Additionally, for customers with a monthly income of less than Dh40,000, banks are permitted to extend the repayment tenor to cover the increase in interest rates, up to a maximum of 30 years, while maintaining the percentage of deduction from salary or income at 50 per cent as is currently in force, provided that banks bear the remaining uncovered interest as a result of the increase in interest rates.”

The UAE Central Bank maintained its benchmark borrowing rate in June as the US Federal Reserve paused its tightening cycle after having increased interest rates to their highest level in 16 years to tame inflation and restore price stability.

The Fed, which increased its benchmark rate for the tenth consecutive time in May, maintained its range of 5 per cent to 5.25 per cent.

Most central banks in Gulf Co-operation Council countries follow the Fed's policy rate moves due to their currencies being pegged to the US dollar, with Kuwait the only exception in the six-member economic bloc as its dinar is linked to a basket of currencies.

The UAE Central Bank kept its benchmark borrowing rate, its base rate for the overnight deposit facility, at 5.15 per cent.

The notice to banks was issued following approval from the Central Bank’s board of directors on a set of measures aimed at easing the burden of increased interest rates on residential real estate loans for UAE citizens.

This followed a study conducted by the Central Bank and after consultations through the UAE Banks Federation on the impact of high-interest rates on the assets, investments and customers of banks, according to the statement.