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Thursday, September 22, 2022

Khaleej Times - UAE: How much interest you will pay for a Dh100,000 loan after latest rate hike

By Arun Leslie John in 'Century in News'

Khaleej Times - UAE: How much interest you will...
Arun Leslie John, Special to Khaleej Times September 22, 2022

The UAE residents who have obtained loans on floating rates are likely to pay higher EMIs after a consistent rise in interest rates this year.

After 75 bps interest rates hike by the US Federal Reserve on Wednesday, the UAE Central Bank followed and increased rates by a similar percentage point for the third consecutive time this year. The UAE Central Bank rates are linked to the Fed’s rates as the Emirati dirham is pegged to the dollar.

“UAE residents who have taken variable rates over fixed rates will be affected by the rates hikes this year. At the beginning of the year, the UAE 3-month Eibor rate was 0.5 per cent whereas today it is at 3.3 per cent. The difference of 2.89 per cent will be felt across all types of variable loans including personal, auto, and home loans,” says Arun Leslie John, chief market analyst, Century Financial.

“Before the latest Fed hike, the interest rate was at six per cent. For a Dh100,000 loan, a UAE borrower who was paying Dh4,458 at the beginning of the year will now pay Dh4,729. The total outgo on a monthly basis will be increased by six per cent from the start of the year. The interest component of the loan has doubled, but since the majority is principal the total outgo on a monthly basis will not rise relatively that much,” he said.

Loans to be costlier

Edward Bell, senior director, market economics at Emirates NBD Research, said the Fed projects the rate at 4.4 per cent for the end of the year which would mean another 125 bps in hikes from September, slightly faster than what the market was expecting.

“Markets look to be pricing in another 75bps hike in November followed by a 50bps hike in December to get to the Fed’s projected level though there is a risk of the Fed choosing to move by 100bps and 25bps. For 2023, the median projection for the Fed Funds rate has also moved considerably higher, to 4.6 per cent from 3.8 per cent in June,” Bell said in a note on Thursday.

Century Financial chief John market analyst said the Central bank of UAE mirrors the Fed’s policy interest rate and since the start of 2022, Fed has hiked interest rates by 3.5 per cent.

“This would now begin to start reflecting on the monthly pay-outs of the borrowers because of the steep rise in interest rates,” he said.

In order to cool rising US inflation, Fed officials see rates rising above 4.5 per cent next year. “By the year-end, markets anticipate a year-end target rate to be around 4.4 per cent, clearly hinting that more rate hikes are on the corner which could result in borrowers feeling the heat,” he added.

Source:
Khaleej Times
Zawya