Gulf News - On mortgages, property buyers in Dubai should be thinking 3-year fixed rate - even 1-year

Dubai: Are you still scouting for a home to buy in the UAE? Through a mortgage-backed sale? If yes to both, just do not try to make the deal happen via a 5-year fixed mortgage rate, even if the maths the bankers provide might seem compelling.

At best, stick to a 3-year fixed-rate. If a risk-taker, then even opt for a 1-year fixed.

Because, possibly, for the first time in the current cycle of US interest rate hikes, there is chatter this could soon draw to a close – and could even be brought down. Now, this is purely all talk at this stage, but for property owners in the UAE – especially end-user buyers with mortgages – there is a lot running on it.

Most important, whether they should lock in their mortgage payments for 3 years or longer.

Thomas McLaughlin is UAE Country Manager at Holo, the Dubai-based fintech that specialises in mortgage advisory.

“The outlook regarding the US Fed rate is for marginal increases throughout 2023 with a plan to potentially start decreasing towards the end of the year/early 2024,” he said. “If this information is to be trusted, then the good advice would suggest a fixed rate for 3 years to provide a balance of security against rate increases through 2023.

“And with the potential to benefit from rate decreases in the future.”

That’s it, anyone buying a property and taking out a mortgage will immediately benefit from a fixed rate for the first year. If need be, they could lock in the EMI for two years and then hope UAE mortgage rates would come down from 2024-25 (in line with US Fed moves).

As of now, mortgage rates are at over 5 per cent in the UAE for a fixed-rate transaction, against 2.99 same time last year.

Impact was there in Q4-22

Mortgage lending slowed down considerably during last October to December, as the full weight of successive rate increases, by 0.75 per cent apiece, forced end-user buyers into a rethink. Local banks also turned a bit ‘conservative’ on their lending towards the end of the year, as they tried to get a handle on consumer demand for loans.

As such, “November and December are typically quieter months in the industry as buyers and sellers wind down for the holiday period,” said McLaughlin. “That being said, at Holo we saw 29 per cent growth which has been followed by our second best month as a company in January 2023. From our perspective, enquiries and transactions are increasing.”

BE ALERT FOR REFINANCE POSSIBILITIES

For existing mortgage holders, late 2023/early 2024 could also be the time when they might be better off thinking about refinancing the loan. If rates do drop, refinancing offers them a chance to be in sync with the changed rate environment.

"Borrowers prefer to refinance when the interest-rate environment substantially changes in their favour, i.e., when the interest rate falls," said Bal Krishen, Chairman and CEO of Century Financial. "This is done to benefit from the reduction in borrowing costs and generate savings from a new agreement.

Cash is dominant

Through January, the mood in the Dubai property market has been upbeat, with cash-based offplan sales dominating. And then there was the Dh400 million plus sale for a penthouse at ‘Bulgari Lighthouse’ on Jumeira Bay island.

While such big-ticket deals are all cash-based, mortgages did reasonably well in January. According to Prathyusha Gurappu, Head of Research at Core, the property consultancy, “In January, there was an almost 50:50 split between cash and mortgage deals in Dubai. While in 2022, nearly 57 per cent were cash and the rest mortgage transactions.”

And glancing to the split in 2021, it was 72 per cent mortgages and 28 per cent through cash. It was also the year when many of Dubai’s tenants switched over to buying homes for their own use after the Covid phase.

So far this year, it could be that end-users are regaining their confidence about paying off their homes through equity and loans, even if there was a 0.25 per cent further increase in the rate last week (and the first one for 2023).

New property owners say that the US Fed slowing down on the rate of increases – from 0.75 per cent to 0.25 per cent now – was a reason that led them to buy now than wait by year-end to see whether lending rates will come down.

“Dubai property values have already gone through 15-25 per cent increases in the popular locations,” said one of the new buyers. “We did not want to risk more increases and that’s why we bought now at a higher mortgage.

“We should ideally have bought early last year.”

Many of today’s mortgage takers would echo that – but if they are patient, those rates could be coming down in a year or so. Until then, have it at a fixed rate…

WITH INTEREST RATES, MUCH CHANGED IN 12 MONTHS

The Fed Funds Rate increased by 400 bps in 2022. Similarly, the UAE increased the base rate of its overnight deposit facility to 4.4% at its December 2022 meeting. With the Fed hikes by 25 basis points now, the cumulative Fed Fund Rate hikes would add up to 425 bps between January 2022 and the present.

To maintain the Emirati Dirham peg to the dollar, the UAE's overnight base rate would reflect a 425 bps rise since January 2022.