While an increase in interest rates is a possibility, the high level of competition among banks is also keeping them in check
Mortgage property purchases in the UAE have been affected by a rise in financing cost seen since the start of the year. But while property buyers have to bear the extra cost, real estate consultants do not consider the increase in interest rate a significant concern.
Dhiren Gupta, managing director of 4C Mortgage Consultancy, says the interest rate is only one of the factors that influence the property market, but overall he does see it creating a significant impact.
“If you look into the Dubai Land Department property transaction report, we see a month-on-month increase, so yes we anticipate a positive movement in property sales transaction despite the rate influence,” says Gupta. “Moreover, the attractive post-handover payment schemes from the developers have changed the market dynamics, enticing the end users and investors to opt for more cash deals.”
Dubai’s attractive yields and value-for-money options are also helping ease the effects of higher interest rates, says Gupta. Moreover, he believes the rates remain reasonable to UAE homebuyers, as banks here maintain an attractive base rate to curtail the cost of borrowing.
The high level of competition among banks is also keeping rates in check. “Banks are applying different strategies to lure the customers,” says Rohit Garg, head of business banking, foreign exchange and mortgages at Mashreq Bank. “Some are offering very low spreads and keeping the rates variable for the tenure of the loan, others are offering fixed rates for an initial period of two to three years to counter the impending increases in rates. The rates still range from 3.75-4.5 per cent, thereby offering options for customers to choose from.”
Garg says that purchase decisions are also heavily influenced by the cash flow situation of buyers. “Once all factors and the down payment are considered, the rate comes into play, and this is when banks are chosen,” says Garg. “Therefore, the effect of rates on property markets is tertiary or secondary at best.”
Mortgage repayments are calculated on a monthly reducing balance basis and homebuyers need to understand that a major component of the instalment will go towards the interest, says Gupta. “Most banks offer a two- to three-year fixed rate and then implement the variable rate,” he says. “Hence, if you are still on a fixed rate plan, then currently you will not be affected. However, if your mortgage rate is on a variable rate, then probably you need to work with your bank or look for some affordable product.”
With the dirham pegged to US dollar, any rate increase by the US Federal Reserve will have a direct impact on UAE lending rates. In June, key interest rates in the UAE increased by 25 basis point following a decision by the US Federal Reserve to raise its benchmark lending rate.
“With an increase in interest rate, auto loans, personal loans and mortgage lending rates would go up resulting in higher expenses,” says Rajiv Ghanekar, senior real estate broker of Keller Williams Real Estate. For a Dh1-million home loan taken for a tenor of 20 years, with a hike in interest rate from 3.99 per cent to 4.5 per cent (50 basis points), the extra monthly payout would be around Dh275 or Dh3,300 for 12 months says Ghanekar.
“Based on the same numbers, over 20 years, with an increase in rate by just 50 basis points, your property would be dearer by roughly Dh66,000,” says Ghanekar.
Investors using mortgage would initially become more cautious about the interest rates rising, but Ghanekar points out that for residential buyers the impact would be minimal, since they would be buying to live in the property and the current property prices are almost 30 per cent below their peak.
“The lending rates for off-plan projects are much higher in comparison to ready properties because the bank’s risk exposure is higher,” says Ghanekar. “An increase in lending rates would make off-plan borrowing more expensive. Therefore, if you have the funds that are currently yielding less than the mortgage rates, use them to pay off the balance payments to the developer. If you do not have them, then you do not have an option but to borrow at higher rates.”
Ghanekar advises homebuyers to raise their equity and borrow less if they can. “Instead of borrowing the permitted 75 per cent loan-to-value ratio, borrow around 60-65 per cent,” he says. “Raising equity helps buy-to-let investors, too, as they would not fall under the negative zone, where monthly mortgage payouts are higher than the monthly rent, as this is never a good scenario. Buyers can further opt in for a reduced tenor if higher monthly payouts are manageable.”
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