Dubai: UAE residents with monthly paybacks on their loans, mortgages and credit card bills will feel an immediate relief from the 0.50 per cent interest rate cut announced overnight by the US Fed and matched by the UAE Central Bank instantly.
The best part of those with EMIs is that the rate cut actually went up to 0.5% rather than the expected 0.25%. Whatever be the case, these will come in quite handy in easing some of the additional costs UAE residents with loans or other exposures had been paying since March of 2022, which is when the US started on its rate hikes. (The Fed hiked rates 11 times since then.)
“Monthly instalments for some mortgage borrowers had surged from Dh3,000 to Dh5,100, reflecting a substantial increase of around 70 per cent,” said Yash Trivedi, founder of Youae, a mortgage consultancy.
“The peak interest rate charged on home loans in the UAE had reached 7.5% to 7.75% after the fixed-rate terms got over for borrowers.”
How soon will more rate cuts happen?
The anticipation among UAE borrowers had been building for a few weeks now, that after 2.5 years, they are finally seeing some reduction on their monthly expenses tied to their loans. The next big deal for them would be to see how soon the US Fed will initiate further cuts and for the UAE Central Bank to match it. (When the US initiated the rate hikes, done to curb inflationary pressures, it had risen from near zero levels to 5.25-5.5%.)
“The Fed has signalled two more rate cuts in 2024, dropping to 4.25-4.5%,” said Bal Krishen, Chairman and CEO of Century Financial. “And in 2025, rates are further expected to dip by 100 basis points."
Borrowers will take all the help they can get from the Fed. And possibly convince those UAE residents or businesses to seriously consider taking new loans to help with their plans.
Mortgage demand boost?
One sector that could see a definite boost from the rate slash will be the UAE property market. Mortgage demand, according to UAE banking sources, had seen some dips during the June to end August phase. Some of which could be related to the summer slackness in demand, but analysts say that many property buyers were holding back and waiting for the rate cuts to begin.
“Post-summer, there has been a small increase in mortgage demand – but the secondary market is seeing fewer inquiries,” said Trivedi. “Many clients are waiting for banks to lower their fixed rates, which could help them save money on interest in the long run.”
"If borrowers can wait a couple of months, they may find even better deals in November and December, as banks typically present their most competitive offers to kick off the new business year in January 2025
That makes sense. The Fed had been telegraphing their intent to drop rates after summer. Now that the first cut has happened, new borrowers have a clear idea of what their EMIs might look like between now and end 2025 if further slashes on the rate side happens on schedule.
Offplan launches in Dubai continue to happen at the same frenetic speed, with HRE Developments this week announcing a project in JVC and backing that with a commitment to spend up to Dh10 billion on projects in the next 3 years.
While offplan launches are relatively cushioned from any slide in mortgage activity, it’s the ready and secondary market deals that need more support on home financing.
During the rate hike cycle, business lending rates in the UAE had increased significantly. While precise figures depend on the bank, sector, and borrower risk profile, it is likely that many businesses are possibly seeing lending rates in the range of 5-7%
At the time of their announcements of H1-2024 results, bankers were insistent that loan demand in the UAE would remain healthy – and so would their loan books and profit margins after the interest rate drops. Coming weeks will provide evidence of whether the mortgage lending is back on even keel, especially when it comes to ready homes or secondary market transactions.
For businesses too, the entry into the lower rate phase adds up to a major relief. “While precise figures depend on the bank, sector, and borrower risk profile, it is likely that many businesses were possibly seeing lending rates in the range of 5% to 7% during the period (before the rate drop,” said Tony Hallside, CEO at STP Partners.
All they need to see now is more relief coming through…
