While many know that the mortgage rate is the primary factor driving mortgage transactions in the UAE, not many know what goes behind it.
Your mortgage rate is determined by your lender based on the Emirates Interbank Offered Rate or EIBOR. Both mortgage rate and EIBOR have a direct relationship. Changes in EIBOR can have a direct impact on your mortgage rate. Let’s understand how, beginning with the basics.
EIBOR is simply the interest rate charged on the funds borrowed by one bank from another. When in need of funds, a bank will borrow from another bank having excess funds, for which it will be charged an interest. Banks usually profit from the transaction and hence lend funds without any reluctance. This interest rate is based on the EIBOR in order to maintain stability in the market.
– 11 banks in the UAE submit their rates to the UAE Central Bank every single day
– The two highest and the lowest rates are removed and an average is taken of the remaining rates
– The UAE Central Bank publishes the derived rate on its website every business day by 11 AM.
How do banks calculate their mortgage rates?
Lenders for mortgage transactions in Dubai and surrounding Emirates, use EIBOR as a reference to set their own interest rate. So an increase in EIBOR will lead to an increase in the mortgage rates charged by the lenders. Similarly, if banks are benefiting from lower EIBOR rates, the same is passed on to the customers in the form of lower mortgage rates.
Banks usually add 3-5 percentage points to the EIBOR to determine their interest rates. A rising EIBOR can generally be attributed to:
– The rising of the benchmark interest rate by the Federal Reserve by a quarter of a percentage point to between 0.25 percent and 0.50 percent
– Low liquidity in the UAE banking sector due to reduced bank deposits
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So how does the EIBOR affect your mortgage?
Mortgages are based on fixed and variable rates.
If your lender is charging you a variable rate, chances are that it changes as per the EIBOR on a quarterly basis. With EIBOR on the rise, you will also see a rise in your monthly payments.
Borrowers who have chosen fixed rates will be unaffected by the rising EIBOR for the stipulated time as per their agreement.
Few banks in the UAE have already begun increasing their mortgage rates due to the rising EIBOR and others are expected to follow soon.
Learn more about mortgage rates offered by banks in UAE
Does it affect your personal finance?
Rent rates in Dubai are already on the rise. Further, an increasing EIBOR can make paying for your home a little more expensive. It will also have an impact on the property market as higher borrowing costs lead to lower property valuations. People looking to borrow general loans this year may also be affected and may end up paying more than otherwise.
On the other hand customers can also benefit from the rising EIBOR as profits made by banks from the increased mortgage rates can be passed on to them in the form of higher interest rates on savings and deposits.
You can visit Dubai Finance to compare mortgage loans offered by banks in the UAE.