Experts say that the US Federal Reserve (Fed) cutting interest rates by 25 basis points (0.25%) will make home loans cheaper for middle-income people.
Interest Rates Dropped to Help Make Mortgages Cheaper:
Both the US Fed and the UAE Central Bank have lowered interest rates to make mortgages more affordable for people buying homes.
On Wednesday, the UAE Central Bank cut its main interest rate by 0.25% after the US Fed decided to lower rates to boost the economy.
The US Fed reduced its interest rates by 0.25% and plans to make fewer cuts next year. The new interest rate range in the US is now between 4.25% and 4.50%, which is one full percentage point lower than when they started cutting rates in September.
The UAE Central Bank also lowered its base rate for overnight deposits to 4.40%, starting Thursday. It kept the borrowing rate for short-term loans at 50 basis points above the base rate for all regular credit facilities.
The UAE Central Bank usually follows the Fed’s rate changes because the UAE dirham is linked to the US dollar.
More People Can Get Larger Mortgages:
Yash Trivedi from YouAE Mortgages says that with lower interest rates, more people can afford bigger mortgages. For example, someone who could get a AED 1 million mortgage before might now qualify for AED 1.2 million because of the lower rates.
Michael Hunter, CEO of mortgage consultancy Holo, adds that some lenders are already lowering their rates to as low as 3.79%. He advises homeowners, especially those with fixed-rate mortgages from the high-interest period, to watch how rates change in the coming months.
More Affordable Homes for Middle-Income Earners:
With lower interest rates, more people can afford mortgages. Yash Trivedi explains that someone who couldn’t get a mortgage before might now qualify for a home loan in six months.
He expects more people to buy smaller homes like studios and one or two-bedroom apartments. Middle-income professionals earning between AED 12,000 and AED 20,000, who couldn’t get a mortgage before because property prices were too high, will now be able to borrow more money.
Fed’s Rate Cuts Impact on the UAE:
The Fed started lowering rates with a 0.50% cut in September due to slowing inflation after keeping rates high for over a year. Last month, the Fed lowered the interest rate on reserve balances by another 0.25%.
These rate increases were due to global inflation caused by supply-chain issues and more workers joining the labor force. Many Gulf central banks followed the Fed’s lead by raising rates from 2022 to 2023 and have kept them steady since last July because the dirham is pegged to the US dollar.
Interest rates in the UAE have been between 4% and 4.5% last year, says Yash Trivedi. Since banks compete a lot, interest rates are similar across banks, and mortgages are sold at a small loss. He doesn’t expect banks to lower rates aggressively because they have already considered the Fed’s rate cuts.
Homeowners and Investors React:
Arran Summerhill, COO of mortgage consultants Holo, says that changes in interest rates haven’t had a big impact on mortgage rates in the UAE historically. However, people still want to own homes because rent prices are increasing faster than property values. Even though the savings from a rate cut might be small, it could still influence some buyers.
Summerhill noticed steady inquiries even before the September rate cut. He believes the rate cut will slightly increase borrowers’ spending power. The average loan in the UAE is about AED 2 million, and properties of interest to buyers range from AED 2.5 million to AED 3 million.
Rajender Prasad, managing director of Money Maestro mortgage consultancy, says most home buyers are end-users, meaning they buy homes to live in them. Buyers range from first-time purchasers to those upgrading their homes. He believes the rate cut will boost activity in the small to mid-range property market, especially around AED 2.5 million, where buyers can find good two to three-bedroom apartments or townhouses, even in the secondary market.
Summerhill also thinks that more competition among banks, possibly leading to new rate or fee reductions, will further boost the market. Refinance inquiries stay steady throughout the year, regardless of interest rate changes. When refinancing, it’s important to do a cost-benefit analysis because there are fees to exit the current mortgage and new loan costs that can be over AED 20,000.
Prasad doesn’t expect customers to rush into refinancing until they see the exact numbers. For those with fixed-rate terms ending soon or thinking about refinancing, it’s important to compare the total costs to decide if switching is beneficial. This group is likely to wait until UAE banks announce the new rates.
Real-Life Impact on Homeowners:
Indian homeowner Shalini Agarwal is waiting to see how much rates will drop before deciding what to do with her property. She has a fixed interest rate of 3.97% for two years from United Arab Bank for an apartment in Dubai.
“If rates fall, I will refinance my mortgage and pay off my home loan sooner. If rates go up after the fixed period, I might have to sell my property,” she says.
Agarwal had to sell her villa in The Springs, Dubai, in 2021 when her fixed-rate period ended, and the interest rate on her mortgage increased. She currently leases her apartment, and the rent covers the loan payments. She hopes to live in the property once interest rates drop.
“I didn’t stop buying property because waiting for rates to drop would mean prices keep rising,” she says. “Banks are very competitive and offer fixed rates for certain periods. Instead of waiting, I can compare rates between banks and get a good deal.”
Increased Demand for UAE Properties:
Lewis Allsopp, chairman of real estate company Allsopp & Allsopp Group, says that lower interest rates will likely increase demand for UAE properties. Rajender Prasad adds that lower rates make borrowing cheaper, making home ownership more attractive, especially for first-time buyers. Lower rates also create a more competitive market as more buyers start looking for homes.
However, Prasad warns that the actual effect on monthly payments depends on how much rates are lowered and whether property prices increase. If lower rates lead to higher demand and higher prices, the impact on monthly payments might be small.
Lower interest rates are expected to boost property purchases from both investors and end-users. Investors might find the current market attractive as they can use mortgage financing to buy multiple properties and diversify their investments. End-users benefit from lower monthly mortgage payments, making home ownership more affordable. If rents go up, more people might prefer buying a home instead of renting.
“We might see more first-time buyers or people upgrading to a new home if the interest rates are good enough,” Allsopp says. “We could especially see more interest in properties that can be renovated or modernized. With lower rates, buyers can use mortgages more effectively, freeing up money to invest in property improvements or upgrades, which could lead to higher selling prices if they decide to sell in the future.”
