Real Estate

Dubai mortgage holders squeezed by end of low fixed rates

March 21, 2024, 11:10 AM

Mortgage holders in Dubai are facing rates increasing by more than 4 percentage points, sending monthly payments soaring

Dubai mortgage rates doubling
Homeowners renegotiating loans
Banks are ‘flush with liquidity’

Purchasing a home in Dubai for AED2 million ($544,600) in 2021 meant manageable monthly mortgage payments of about AED7,600, at a 2 percent interest rate secured for three years.

With these fixed-rate contracts now expiring, home owners have told AGBI that banks are rolling over to rates as high as 7 percent, resulting in monthly repayments rising by more than half to around AED12,000.

This hike in rates has driven homeowners to renegotiate with lenders.

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Despite the extra financial burden being placed on Dubai mortgage holders, experts remain optimistic about the market’s stability.

With rental returns averaging 6 to 7 percent and asset values appreciating in the double digits, Sawan Karia, a director at digital mortgage platform Huspy, said healthy yields help to cover any increase in the cost of the mortgage, acting as a buffer against high delinquency levels.

Delinquency rates compare the percentage of loans that are overdue to the total number of loans.

Jeffrey De Souza, head of financial services at Lomond, an affiliate of Betterhomes, said renegotiating rates and remortgaging properties was an option.

He added that many banks are working to retain clients by offering them favourable fixed rates.

But Stuart Roe of real estate agency Allsopp & Allsopp pointed out the complexity of the refinancing process amid new affordability stress tests and new rates hovering 50 to 75 points above baseline.

He said the new calculations mean people cannot borrow as much, which may be an issue when looking to switch lenders for a better rate.

Nonetheless, he said the banks were “flush with liquidity” and want to lend so they are willing to talk to borrowers eager to switch.

Srinivasan Padmanabhan, mortgages business manager at Mashreq, said the bank has not seen any significant increase in delinquency rates, even as clients shift from fixed to variable rates.

“Property prices continue to be on the rise and loan to values are favourable for most loans and mortgages, allowing clients to reprice their facilities by renegotiating interest rates,” he said.

Loan to value is the ratio of the value of the home you want to buy and the loan you would need to buy it, shown as a percentage.

The US Federal Reserve left interest rates unchanged at the conclusion of its March meeting, but held onto its forecast for three cuts in borrowing costs this year.

The anticipation of further US Federal Reserve rate cuts could ease pressures, making fixed rates even more competitive.

Huspy’s Karia said homeowners can switch or refinance their mortgages to new providers, securing rates as competitive as 4 percent.

“Banks are being extremely competitive by offering rates below the cost of funds, which indicates that they are preparing for a broad interest rate reduction,” he said.

However, homeowners expressed frustration to AGBI over the sluggish pace at which banks are handling rate renegotiation requests.

“All the bank said was that I can submit a request, but that negotiations with the mortgage team will take time,” one said.

Fed rates – what next for Gulf borrowers?

James Swanston, economist at Capital Economics, told AGBI the decision by the US Federal Reserve to leave interest rates unchanged was widely anticipated and will mean that, by virtue of their dollar pegs, the Gulf central banks will stand pat – leave interest rates unadjusted – too.

The market-implied odds of that first cut coming in June have now risen to 80 percent, he said. The loosening cycle could begin with the Fed cutting interest rates by 100 basis points this year, which the Gulf central banks will follow.

“All told, with the prospect of looser monetary policy on the horizon too, bank lending could grow in the Gulf and bolster non-oil sectors this year,” he said.

But Scott Livermore, chief economist at Oxford Economics in Dubai, said that the first cut by the Fed in June is likely to mean little for the GDP and inflation outlook in the US and the Gulf.