A guide to mortgages in the UAE as interest rates rise

Buying a home with financing in the Emirates is affordable compared with other global markets

In the UAE, fixed-term mortgages can typically be secured for three to five years. Alamy

Over the past three years, through a period of global uncertainty, the UAE’s real estate market has remained buoyant.

Low interest rates, an ample supply of homes and policies that encouraged long-term residency in the UAE meant more people were considering buying a home in the country.

While Dubai continues to lead the domestic real estate market, Abu Dhabi, Sharjah and Ras Al Khaimah are also attracting buyer demand.

The UAE dirham’s peg to the dollar, however, means that borrowers are not immune to interest-rate changes by the US Federal Reserve in its fight against inflation.

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Foreign buyers are also choosing to invest in a trusted pegged currency, thereby reducing the risks of devaluation.

With 11 increases since 2022, homeowners have felt the effect, particularly those with variable interest rates.

However, buying a home with financing in the UAE is still affordable compared with the US, where home lending rates are already more than 7 per cent, a 22-year high.

Homeowners must, therefore, evaluate their options and consider ways they can manage their finances efficiently to pay off their mortgages.

Review your current mortgage payment plan

For some time, homebuyers in markets such as the US have had the option to choose 30-year fixed-term mortgages. This was particularly beneficial for those who bought a house while rates were in the low single digits.

However, in the UAE, fixed-term mortgages can typically be secured for three to five years. That is why, in times like these, those coming up on their initial term, or with variable rates, are affected the most.

A 0.25 per cent rate increase may seem minimal on the surface, but over the years, this can have a sizeable impact on finances.

It is imperative, therefore, that these individuals review their existing mortgage terms and understand the increase in payments, if any.

Customers with fixed rates over the near term must also look at pre-payment, either up to the maximum permissible limit without penalties or by reducing their mortgage tenure.

This helps to protect buyers from rising costs as a result of future rate increases. While banks might charge a fee, up to 1 per cent of the outstanding amount for early payment, the potential savings can be significant.

Options to manage mortgages

Refinancing a mortgage has emerged as a popular choice for homeowners, given the rapid pace of rate increases.

With refinancing, homeowners can choose whether they’d like to change their mortgage terms, rate, borrowing period and payment schedule.

However, refinancing comes with its own costs, such as early settlement fees and valuation fees.

While many banks do not charge processing fees on refinancing, there are government fees for mortgage registration, re-registration and trustee centre fees.

Moreover, not all homeowners may qualify for refinancing, especially if their property value has declined or their income has been affected, for example, by the pandemic.

They should also consider whether refinancing is the best option they have and work with mortgage consultants who can provide a comprehensive market view of current bank offers and a breakdown of savings.

Refinancing a mortgage has emerged as a popular choice for homeowners, given the rapid pace of rate increases

Fouad Chemlati, general manager, mortgages, Huspy

Similarly, digital platforms enable choice at scale. Today’s property technology advances mean that customers no longer need to go from bank to bank looking to apply for loans.

With technology integrated into most of the homebuying journey, customers now have one place to find and finance a home.

Banks simply need to submit their best offers and customers can receive refinancing plans, fees and pre-approval online.

The long term looks extremely positive

With just one more rate increase anticipated before the end of the year, homeowners must stay focused on the long term.

Any planned disruption to payment schedules must be carefully considered against the potential upside in property values and growth of tax-free rental income.

Not many world-class property markets are able to match the UAE’s rental yields, which average between 7 per cent and 10 per cent, providing a stable route to income generation.

The capital appreciation on homes is also extremely attractive, rising to as much as 100 per cent over two years in some cases.

Homeowners shouldn’t disrupt or default on their payment schedules as this could also impact their credit profile.

In fact, this is an opportunity to gauge their ability to meet any additional costs and consider refinancing with better terms, rates and tenures.

As the Fed brings its interest-rate increases to a close, mortgages will probably stay flat or even start to reduce.

The solid combination of strong returns, high-quality lifestyle and affordable financing will leave UAE homeowners pleased with themselves for choosing to buy in one of the world’s fastest-growing property investment destinations.

Fouad Chemlati is general manager for mortgages at PropTech start-up Huspy

Updated: August 04, 2023, 4:00 AM