Is the US Federal Reserve out to spoil the UAE property market’s mortgage party? The latest rate hike, up by 0.25 per cent, and the ones to follow in short order will be leaving UAE mortgage takers with much higher instalment costs than what they had signed up for.
Here’s a typical example; assume an end-user made a 30 per cent down payment (Dh450,000) on a Dh1.5 million apartment and takes out a mortgage of Dh1.05 million for 25 years.
When the monthly repayments mirror the 0.25 per cent hike, the buyer will have to pay Dh171,000 extra in interest payments over the lifetime of the mortgage.
And if the Fed takes the rate hike to 1 per cent in the coming months, the EMI (equated monthly instalments) on this Dh1.05 million mortgage will jack up to Dh5,682 a month from Dh5,111 (before the 0.25 per cent hike effected on December 13, according to estimates from GCP-Reidin.
The rates hikes do come at a crucial time for the mortgage marketplace in the UAE. All through the year, there has been a gradual increase in the number of end-users buying property financed through homes loans.The latest data records that this year, 97 per cent of apartment deals were effected through mortgages (as against a mere 19 per cent in 2010). As for villas, mortgages are there in 58 per cent of the deals and up from 48 per cent in 2010.
According to Sameer Lakhani, Managing Director of Global Capital Partners, the burden of the US rate increases needn’t be felt by all those with mortgage exposures in the UAE.
“Mortgages are on fixed rates for between one and three years and thereafter switch to a floating mechanism,” said Lakhani. “So, the impact of rate rises in the US will be felt with a lag in the mortgage market, especially on the recent mortgage deals. Also, it is important to remember that mortgage rates still remain at historically low levels, and this structural adjustment in interest rates is unlikely to subdue demand in the short term.”
Interestingly enough, according to the GCP-Reidin report, the take-up of mortgages have been higher in the luxury space than in the mid-market. For instance, mortgage-backed purchases involving properties on the Palm are up “three-fold” in the last seven years.
City-wide, mortgages are now a part of 61 per cent of property transactions as of November 2017 numbers.
The fact that developers are reducing the upfront payments on recent off-plan sales and backending the rest — at handover time or well after — means demand for mortgages will be there.
But will the higher payments force some rethink from prospective buyers? Especially with other cost burdens on the horizon in the form of VAT charges on a host products and services. (There is, however, no VAT specifically on mortgage payments.) In a statement, Emilio Pera, Partner and Head of Financial Services at KPMG Lower Gulf. said: “The interest rate increase will naturally translate to higher borrowing costs and affect rate-sensitive sectors such as automobiles and real estate. With the implementation of VAT, it will be interesting to see how borrowers react to simultaneously rising costs.
“We believe that local banks, which use their standard variables rates to price a new transaction, would have factored in some of the impact of the rate hike, which was widely expected.”
Sure, the latest 0.25 per cent was indeed factored in by banks and mortgage takers. But what of the Fed’s forward guidance of a possible further three hikes in 2018?
Can it cut into the mortgage momentum the UAE realty market has seen this year? From a bank’s perspective, they “will need to carefully consider the impact when advancing credit to local borrowers given the policy changes planned for the next year,” said Pera.
As of now, mortgage rates in the UAE typically vary between 2.5 and 5 per cent per annum. This, of course, depends on the structure of the mortgage — whether it is a fixed rate or variable rate or a combination of both.
What a 1% hike in US Fed rates could entail for UAE mortgage takers
* Property value — Dh1.5 million
* Loan period — 25 years
* Down payment — 30%
* Interest rate: 3.24%
* Rate hike: 1%
* Land Department fee: Dh60,540
* Registration fees: Dh4,000
* Mortgage registration: Dh2,635
* Brokerage fees: Dh30,000
Breakdown before rate hike:
* Total expenses that include registration fees and the like: Dh100,175
* Down payment: Dh450,000
* Loan value: Dh1.0 million
* Monthly instalments: Dh5,111 (Dh3,500 being the principal and Dh1,611 the interest)
After rate hike of 1%
* Monthly instalment: Dh5,682 (Dh3,500 being the principal and Dh1,757 being the interest)