How lower interest rates affect borrowers and savers in the UAE

Property owners and new buyers are set to benefit when reduced rates are applied to mortgages

The tenants want to understand how long they can legally stay in the Dubai villa. Jeff Topping / The National

Lower interest rates in the UAE will incentivise borrowing particularly for mortgage products and spur economic growth, according to analysts, but savers will once again face lowers returns.

The Central Bank of the UAE cut the interest rate by 25 basis points (bps) to 2.25 per cent on Thursday following the US Federal Reserve’s decision to cut its benchmark rate by one quarter of a percentage point to a range of 1.75 per cent to 2 per cent as the US regulator attempts to boost economic recovery and combat low inflation.

This reduction in the monthly repayment could mean owners are left with surplus cash, which they could use to pay down their mortgage more quickly by making overpayments.

Ambareen Musa, founder and chief executive of UAE price comparison site Souqalmal.com, said a lower interest rate environment can help “incentivise borrowing”, particularly for mortgages, and “spur economic growth in the UAE”.

“With a high inventory in the UAE housing market, there are great deals available on both off-plan and ready properties. Coupled with potentially lower mortgage rates and closing costs, this could be just the stimulus required to invigorate the property market and the economy," she said.

There are roughly 3 million active borrowers and 6.5 million credit facilities such as loans, credit cards, mortgages and overdrafts in the UAE, according to November data from the Al Etihad Credit Bureau.

Jonathan Rawling, chief financial officer at the UAE price comparison site yallacompare, said consumers will be more confident about taking on variable rate loans to finance car or home purchases as the fear of interest rate hikes diminishes.

Chris Schutrups, managing director of Mortgage Finder, said consumers with existing variable rate mortgages will gain first as their monthly repayments reduce once the rate change is reflected in the Emirates Interbank Offered Rate (Eibor), a benchmark base rate used by most UAE banks when setting interest rates on credit.

"This reduction in the monthly repayment could mean owners are left with surplus cash, which they could use to pay down their mortgage more quickly by making overpayments," said Mr Schutrups, adding that banks will soon start to lower fixed rates and offer more competitive products.

Lower rates could also ease lending criteria for new borrowers.

“All banks put a stress test on a mortgage for new applications, if the interest rates are lower, then the stress tests will be lower, therefore making mortgage eligibility and borrowing more accessible for some,” said Mr Schutrups

This was the second rate cut by the Fed this year, with the first since 2008 in July when the US regulator looked to protect the economy from the effects of the trade war with China, low business investment and a slowdown in manufacturing.

Daniel Richards, a Mena economist with Emirates NBD, said it was unclear whether there would be further cuts this year.

"Jerome Powell insisted that the Fed would remain data dependent and would not hesitate to ease monetary policy further should economic activity slow down,” he wrote in a research note, adding that markets closed flat on Wednesday and the US dollar appeared unaffected by the Fed’s decision.

While lower rates are welcome news for borrowers, it spells poor returns for savers already hampered with low saving and fixed-deposit rates.

"Just as we were beginning to see some interesting high-yield savings, deposit and hybrid accounts pop all over the UAE banking scene, an interest rate cut will dull the shine on these products," said Ms Musa.