Spike in UAE mortgage rates: Homebuyers are running to refinance their UAE mortgages into cheaper, lower fixed rates

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Mortgage rates in the UAE increased drastically in 2022 putting an increasing pressure on homeowners which still have variable rates. Schedule a free consultation call with Lenddoo to simulate your savings. Lenddoo is the UAE’s leading commission free refinance mortgage advisor.

Introduction

2022 has been an amazing year for the UAE and Dubai’s Real Estate markets across all key metrics:

  • In terms of transactions: in the 9 months from January to September, Dubai has registered xx transactions, % higher than 2021 and 2020
  • In terms of price index, Dubai’s real estate price index increased by xx% YTD, marking it one of the best years for the market
  • Yet, all other metrics show that we are still far from a bubble and that healthy growth is forecasted on the short to medium term

    Yet, mortgage buyers are having a grim lookout: UAE Mortgage rates, driven by the 3M EIBOR, increased by 4% in a matter of 12 months. This has 3 direct implications on existing homebuyers:

  • Mortgage owners with variable rates are seeing their monthly payouts increasing drastically month over month
  • Mortgage owners with soon to be variable rates will also see a major jump in their payouts as soon as their mortgage rates turn to be variable, which could put households with high DSR (debt stress ratio) into financial distress
  • This will probably not stop in 2022, as the US FED (and by implication the UAE Central Bank) is expected to continue its interest hikes to fight inflation.

    For every 1M AED of mortgages, Lenddoo Mortgages estimate that homebuyers will be paying an additional ~3k AED / month compared to the same period last year. And while the sky is getting darker every day for variable rates owners, solutions exist for early and savvy mortgage holders to refinance their mortgages into fixed rates.

    101. Mortgage structure in the UAE, as explained by Lenddoo Mortgages

    When newly homebuyers contract a mortgage to finance their properties in the UAE, these mortgages come in 2 possible forms:

  • Day 1 variable rate mortgage: a mortgage which is variable from day 1
  • Fixed rate mortgage for 1Y, 3Y, or 5Y, followed by a variable follow-on rate: a mortgage which has a fixed rate for a period of 1Y, 3Y or 5Y, before becoming variable post the fixed period

Variable rates follow a typical structure of “1 or 3M EIBOR + Bank margin”. The Bank margin usually goes from 1% to 3%, depending on the bank and the profile of the buyer. 1M EIBOR and 3M EIBOR are indices set and tracked by the UAE Central Bank, which define “the risk-free, basis” mortgage rate in the UAE.

Post the fixed period, all mortgages become variable and follow the structure of 1M or 3M EIBOR + Bank margin, unless refinanced into fixed rates for another period of 1-5Y.

In an environment where rates increase between the moment the mortgage has been contracted and the moment it became variable, mortgage holders end up paying more than the initial monthly payments. We say that homeowners become “exposed” to mortgage rates variations.

102. What happened with the mortgage rates in the UAE?

                                                            UAE 3M EIBOR evolution November 2008 – November 2022 – at the highest since the global financial crisis in 2008.

Following the FED, and with the objective to tame inflation, the UAE Central Bank has raised the EIBOR to 4.2%, the highest since the financial crisis in autumn 2008. A year ago, in November 2021, the 3M EIBOR was at 0.2%. It increased by 4% in a matter of 12 months, increasing the pressure on mortgage owners who chose variable rates or did not refinance, and making it even more expensive for new homebuyers.

103. What implications does it have for mortgage holders in the UAE ?

Rising mortgage rates in the UAE has 3 main implications on existing mortgage owners:

  • Owners with a variable rate mortgage: monthly payouts will increase as the 3M EIBOR continues increasing, driven by higher interest payments
  • Owners with a fixed rate mortgage, becoming variable in the next 1 to 6 months: A spike in the monthly payout will be expected, driven by the difference in variable rate (4.2% + 1-3% ) vs. the initial fixed rate (2-3%)

For every 1M AED of mortgage, monthly payouts are increasing by ~3k AED / month compared to November 2021. (if you have a mortgage of 2.5M AED, you should expect an increase of ~7.5k AED/month)

104. What should mortgage owners do about it?

The UAE banking market still offers cheap fixed mortgage offers for homeowners willing to refinance their mortgages. In fact, as of November 2022, several banks offer 3Y fixed rate mortgages with a fixed rate of 4.4%, much lower than any existing variable rate mortgage. Banks can in fact offer such low-rate mortgages driven by large Retail deposits that allow them to offer mortgages below or approximately equal to the 3M EIBOR mark.

Lenddoo Mortgages, founded in 2022, is already the UAE’s leading refinancing mortgage proptech and has helped hundreds of homebuyers compare, select and get a cheaper fixed rate mortgage.

Holding a variable rate mortgage? Schedule your free 30min consultation video-call with Lenddoo and simulate your savings.

Lenddoo’s services are 100% commission free, as they get remunerated by their banking partners.

Lenddoo Mortgages Refinance FAQ

I am holding a variable rate mortgage in the UAE. Why shall I refinance?

Yes you should refinance your mortgage in the UAE as soon as possible. Here is why:

  • In a rate increasing environment, your mortgage monthly payout increases with time. If you are on a variable rate, you are “exposed” to variations in the mortgage rates, which are driven by the UAE Central Bank.
  • If rates are expected to keep increasing, as it is today, your mortgage payout is also expected to increase, unless you refinance it into a fixed rate mortgage.

When shall I refinance my UAE mortgage?

  • If your mortgage is variable or becoming variable in 1-6 months, now is the perfect time to refinance your mortgage. As of November 2022, there are still very attractive mortgage options with fixed rates as low as 4.4% for 3 years. Choosing a fixed rate now will reduce the down-side for the next 1 to 5 years.

    My mortgage rate in the UAE is becoming variable soon. Am I exposed?

  • Yes, you are exposed to the variations of the rates as long as you are not refinancing. 3M Eibor which most of the mortgage rates are based on, has increased by 4% in the last 12 months. Which means that for a mortgage of 1M AED, you end up paying ~35,000 AED of interest more than last year’s mortgage payments.

    Do I have to wait for my rate to be variable before refinancing?

  • No, you don’t have to wait until it becomes variable to refinance. Since rates continue increasing, it is better to refinance as soon as possible to be able to capture and “freeze” a low rate today.

    What is the process to refinance my mortgage in the UAE?

  • The process is straight forward, paperless and takes less than 5 days if done with the right mortgage provider. Speak to Lenddoo Mortgage Advisors to compare, select and get the right refinance offer for your profile. Once you select it, Lenddoo requests an approval from the Bank, which then buys back the mortgage from your existing bank at the new rate.

    What are the fees associated with a refinance? 

  • There are 4 fees to consider.
  • Bank settlement fee: Min (10,000 AED, or 1% of the mortgage value), capped at 10,000 AED
  • Property valuation fee: which can be anywhere between 2,650 and 3,150 AED, depending on the bank
  • Mortgage registration fee: 0.25% of the mortgage value
  • Mortgage broker fee:0 ! Lenddoo Mortgages is free to you, as they get remunerated by our banking partners.

Despite the fees, which are approximately ~1% of the mortgage, savings over the next 3-5 years are expected to be at the range of 6-7% (~approximately 1-2% per year) which outgrow the fees.

Lenddoo Mortgages, founded in 2022, is already the UAE’s leading refinancing mortgage proptech and has helped hundreds of homebuyers compare, select and get a cheaper fixed rate mortgage.

Holding a variable rate mortgage? Schedule your free 30min consultation video-call with Lenddoo and simulate your savings.

Looking to acquire a new property? Simulate and compare UAE’s best mortgage rates here.

Lenddoo’s services are 100% commission free and are remunerated by their banking partners.

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