Understand the difference Fixed vs variable mortgage rates in the UAE

New investors looking to buy property in the UAE can find the task of understanding a staggering number of terms daunting. Among the most important differences to understand is how they can secure mortgages with two distinct interest rate terms.

Definitions:

1.     Fixed rate mortgages

UAE banks offering fixed rate mortgage contracts from keep the interest rate you pay on your mortgaged property unchanged for a period of 1 year, 2 years, 3 years, 4 years or 5 year, before switching to a variable rate. During the “fixed period” all mortgage payments will carry the same amount of interest charged. Once the fixed rate period ends, however, the mortgage will move to a variable rate.

Pros:

• During periods of volatility or in which central bank rate hikes are expected, a fixed rate mortgage contract will offer protection against unpredictable rate increases
• Easier to budget for

Cons:

• If lending rates* fall, buyers will not see any benefit in the form of reduced payments for the duration of the fixed rate period
• In order to make up for locking in a fixed rate for a period, the reversion rate offered by banks will often carry a significant markup from EIBOR*

Verdict: Fixed rate mortgages in the UAE favor those looking for short-term contracts of up to 60 months/5 years. After the fixed rate period, longer mortgage contracts in the UAE will divert a much larger portion of the payments to interest.

2.     Variable rate mortgages 

Variable rate mortgage contracts in the UAE add a markup on top of the prevailing EIBOR rate. Because the EIBOR rate can change, the interest rate per payment can vary — even if your payment per month remains the same.

Pros:

• Any decrease in the EIBOR rate will be reflected in the portion of your mortgage payment diverted to interest

Cons:

• Central bank interest rate hikes will raise EIBOR, which will also raise the effective interest rate on your monthly mortgage payments
• More complicated to budget for given varying interest component

Verdict:
Because the variable rate is often lower than the reversion rate charged by fixed rate mortgages (after the fixed rate period ends) a variable rate mortgage is ideal when you expect to mortgage a property in the UAE for more than the short-term.

Our recommendation:

In periods where rates are expected to increase, it is recommended to opt for fixed rates for as long as the rates increase are expected, knowing that after the fixed duration, mortgage holders can always refinance their mortgages and review the rates for another fixed period.

*EIBOR (Emirates Interbank Offered Rate): Published by the UAE Central Bank, and based on the average interest rate across all UAE banks within a particular period (excluding the two highest and two lowest rates). The EIBOR periods are: overnight, 1 week, 1 month, 3 months, 6 months, 12 months.

We hope you found this article helpful. Are you considering buying a property in Dubai or Abu Dhabi?  For support in getting your mortgage, start your journey and get pre-approved today with Lenddoo, the most trusted mortgage broker in the UAE!