Big Fed rate cut needed for ‘noticeable’ changes in UAE mortgage borrowing costs

Impact of Fed decision on home loans may not be as big as expected as local banks were already lending below the Eibor rate, experts say

UAE mortgages have not seen significant changes from the last Fed rate cut in December. Getty Images

The US Federal Reserve’s decision to keep rates unchanged on Wednesday will not have a significant effect on UAE mortgages, and a 0.50 per cent rate cut, or more, is needed for “immediate noticeable changes” in borrowing costs, experts say.

Since the UAE Central Bank generally follows the Fed’s monetary policy decisions and because the UAE dirham is pegged to the US dollar, changes in Fed rates are traditionally correlated to the Emirates Interbank Offered Rate (Eibor) index. This is the rate at which banks lend to each other. A rate cut leads to a decrease in Eibor.

“A lower Eibor makes mortgages more affordable for potential homebuyers, which could lead to an increase in property demand. Moreover, homeowners with variable-rate mortgages will see an immediate reduction in their interest rates, easing their financial burden,” says Yash Trivedi, founder of mortgage advisory company YouAE Mortgages.

He adds that while many customers expect interest to likely decrease, the timing and magnitude of such reductions, however, remain uncertain at this stage. “Clients ... recognise the potential for lower interest rates in the future.”

The UAE Central Bank kept its benchmark interest rate unchanged on Wednesday, after the US Federal Reserve held its policy rate steady as Washington’s tariff war with global trading partners continues to cloud the economic outlook of the world’s biggest economy.

The Federal Open Market Committee kept the borrowing rates at 4.25 per cent to 4.50 per cent range for a second time since US President Donald Trump assumed control of the White House for another four-year term in January. The Fed cut rates by a cumulative 100 basis points last year.

The UAE Central Bank kept its base rate for the overnight deposit facility at 4.40 per cent, it said on Wednesday. It has also decided to maintain the interest rate applicable to borrowing short-term liquidity from the CBUAE at 50 basis points above the base rate for all standing credit facilities.

When the Fed changes interest rates, it has a ripple effect throughout the broader economy. Lower rates make borrowing money cheaper. This encourages consumer and business spending and investment, and it can boost stock prices.

An increase in interest rates makes it more expensive for companies to raise capital. If a company is seen as cutting back on its growth or is less profitable, this will lower the price of its stock. If enough companies experience declines in their stock prices, the whole market or key indexes, such as the Dow Jones Industrial Average and S&P 500, will go down.

No major changes since last rate cut

UAE mortgages have not seen significant changes from the last Fed rate cut in December because local banks were already lending below the Eibor rate, according to Rajender Prasad, managing director of Money Maestro mortgage consultancy.

Recent trends show a drop in bank lending rates over the past four quarters as UAE banks have been passing on the effects of interest rate cuts to end users. If the Fed implements a rate cut of 0.50 per cent or more, it could lead to more immediate noticeable changes in the UAE mortgage market, potentially lowering interest rates further and stimulating the real estate market, he says.

Mr Trivedi of YouAE Mortgages highlights that many banks have already factored in anticipated interest rate reductions and are currently offering “highly competitive” mortgage rates in the market. Therefore, even if interest rates do decline, the impact on the UAE mortgage landscape may not be as significant as expected, he says.

Yash Trivedi, founder of YouAE Mortgages, says homeowners with variable rate mortgages will see an immediate reduction in their interest rates after a Fed rate cut. Photo: Yash Trivedi

Rent increase drives home ownership

Mohamad Kaswani, managing director of Mortgage Finder, says homebuyers are waiting on the sidelines in anticipation of a market slowdown or price correction, and most of them are rushing into the market in response to the continuous rise in rents.

Three factors are sustaining a healthy and active mortgage market in the UAE, he says.

“First, demand for ready properties remains high as more residents transition from renting to home ownership. Second, with mortgage rates now lower than rental yields, buying is increasingly seen as the more financially viable option. Third, refinancing activity is accelerating, as homeowners take advantage of rate movements to secure better terms or release equity for upgrades or investments,” Mr Kaswani explains.

Refinancing activity is increasing, driven by two key factors. Firstly, most UAE homebuyers opt for three-year fixed mortgages. With 2022 marking the start of the growth cycle, many loans are now up for renewal, prompting borrowers to seek better rates, he points out.

Additionally, strong home price appreciation means some homeowners who bought in 2022 have seen their property values double, creating an opportunity to refinance, unlock equity, and either renovate or invest in a second property.

This combination of rate dynamics and equity growth is fuelling the refinancing trend, Mr Kaswani reckons.

Mr Trivedi clarifies that it is less common for customers to pursue refinancing solely to secure lower interest rates in anticipation of further rate declines, as there are costs associated with switching from one bank to another.

Fed's interest rate cut: How Gulf economies are reacting

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Who benefits from a rate cut

Customers with existing variable-rate mortgages benefit from rate reductions immediately, according to Mr Trivedi.

Also, when the Fed indicates a potential reduction in rates, it incentivises banks to introduce more aggressive fixed-rate pricing options to support new homebuyers, he says.

Average interest rates today

The lowest interest rates currently offered by banks in the UAE are 3.75 per cent fixed for a year. However, most banks are offering a rate of 3.99 per cent fixed for three years, which includes a salary transfer, according to Mr Trivedi.

Mr Kaswani believes the “most popular” mortgage options in the UAE range from 3.99 per cent to 4.49 per cent for three-year fixed-term mortgages, with short-term variable rates as low as 3.75 per cent. He adds that mortgage rates in the Emirates remain “significantly lower” than most global markets.

“However, it’s important to understand that the lowest rate doesn’t always mean the lowest cost. Mortgage seekers should consider the overall structure of the loan, including fees, terms, early settlement penalties, and the cost of mandatory mortgage life and property insurance,” he explains.

“A slightly higher rate with more flexible terms can sometimes result in better long-term savings than a lower-rate mortgage with hidden costs. Educated decision-making, rather than seeking the lowest rate, ensures buyers secure the best mortgage for their financial goals.”

Fixed versus variable rate

Mr Prasad from Money Maestro says people prefer to opt for fixed-term rate for two or three years because it offers them certainty of cash flow and financial piece of mind for three to five years.

New homebuyers come with a certain amount of down payment while buying a home, hence they can’t manage a sudden surprise in loan repayment, which can disturb their financial discipline, he says.

Mohamad Kaswani, managing director of Mortgage Finder, says the lowest interest rate on a mortgage does not always mean the lowest cost. Photo: Mortgage Finder

Sometimes, variable rate comes with a lower margin, but the market fluctuation can impact the homebuyers’ pocket immediately, hence larger number of mortgage clients are in fixed-term pricing “if guided properly”, he adds.

However, Mr Trivedi cites how some banks are currently offering “exceptionally low” variable-rate margins for those who opt for a variable product from day one.

“This presents a unique opportunity for customers to lock in a very low margin, which they may not have the chance to do in the future. Given the current market conditions, this could be the best time to consider a variable-rate product,” he suggests.

Mortgage industry outlook

The outlook for the UAE mortgage industry in 2025 is positive, driven by lower interest rates and the handover of new properties in the market. Additionally, some banks are beginning to offer financing for off-plan properties, further boosting demand, according to Mr Trivedi.

Mr Prasad says: “Dubai has crossed Dh34 billion ($9.3 billion) worth mortgage transaction year to date in 2025. Approximately 75,000 units are expected to be handed over this year. Keeping these numbers in mind, the remaining three quarters look exciting.”

Impact on property market

Betterhomes chief executive Louis Harding says the real estate company has not experienced anything, “even anecdotally”, to suggest that buyers have been waiting for a reduction in rates before committing to buy property.

A reduction in rates is always welcomed by mortgaged buyers across different price sectors and can help to improve overall market sentiment, he explains.

“However, Dubai real estate is not experiencing a lack of confidence nor is it an overleveraged market,” Mr Harding says.

“It’s also important to remember that it has seen unprecedented price growth over the past four years, most of which was during an upward cycle in interest rates.”