How Interest Rate Changes Impact Mortgage Approvals in the UAE

A mortgage is usually the most difficult obstacle in buying a property within the UAE. It's not just about finding the right home but also knowing how to navigate the financial system which supports homeownership. 

The most important element in this process is interest rates. Rate changes affect the market for mortgages, influencing the buying decisions of bankers, buyers and regulators. How exactly do these fluctuations affect loans in the UAE? Let's look at it in detail.

What Is an Interest Rate?

Rates of interest are the cost of borrowing money. 

When you take out a loan from a bank through a mortgage the interest rate decides how much you'll be able to pay the bank over the length of loan. 

The maximum length of a mortgage is for 25 years. If, for instance, you take out AED 1,000,000 and pay a rate of interest of 3.3% over 25 years, the repayment amount will be lower than if you were paying at 4%. 

This difference of just 1 percent may not seem like much, however it can make an enormous difference, especially in an economy such as the UAE where home prices are so expensive and mortgages can run into the millions. Contact realtors in Dubai.

How Interest Rates Are Set in the UAE

The Central Bank of the United Arab Emirates (CBUAE) is the one who sets interest rates for the UAE. It is the United States Federal Reserve heavily influences the mortgage interest rates. Why?

Because The UAE dirham is linked in relation to the US dollar. If you see the Federal Reserve raises or lowers rates of interest and it is the Central Bank of the UAE typically is also affected. 

Also, the global economic climate as well as the inflation rate and the monetary policy of the US directly affect the interest rates UAE residents pay for their home loans.

Impact on Mortgage Approvals

As interest rates increase and borrowing costs increase, borrowing becomes more costly. It can have a knock-on impact upon mortgage acceptance. Let's examine how:

Affordability Assessments Tighten

The banks in the UAE utilize the debt-burden ratio (DBR) to assess whether you are able to afford to take out a loan. A mortgage's DBR is the proportion of your income each month which is used to pay off debt, which includes your mortgage. 

An increase in interest rates can increase your DBR beyond the maximum limit generally approximately 50 percent within the UAE. If this occurs your mortgage application may be denied.

Let's look at this through an example. Let's say your monthly earnings are AED 20,000. You're applying for a mortgage loan with an estimated monthly installment of AED 8,00. If interest rates increase and your payments increase to AED 9,900 then your DBR rises from 40 percent to 45 percent. 

The increase may still be acceptable, however any further rate hike (above 50 percent) could cause you to cross the threshold.

Reduced Loan Eligibility

The higher interest rates can also lower the amount of loan you can get. If a lender determines that you are able to only pay AED 10,000 in a month, having a higher rate implies that a lesser part of the payment is going to the principal amount. 

This means that you'll be approved for an amount that is smaller. This could be a source of frustration for buyers who have decided to purchase the property, but discover they are unable to be able to afford it. Contact realtors in the UAE.

Stricter Credit Criteria

Banks may tighten lending guidelines to limit the risk of being a victim when interest rates rise. 

They could raise the credit score thresholds, add income verifications, or increase the amount of checks for current debt. The higher rates could make getting a loan harder if you have a weak credit history or have debt.

How Buyers React

An increase in rates could create confusion among buyers. They might be hesitant to make plans. Between 2022 and 2023 the UAE saw a number of rate increases due to the Central Bank aligned with the Federal Reserve's tightening policy. The mortgage interest rates in the UAE increased by an average 2.5 percent in 2021 to over 5% in the latter part of 2023. This meant that many middle-income buyers were unable to obtain loans. 

A few who had pre-approved mortgages were able to cancel their loans due to the increased monthly payments required.

Tips for Buyers

If you're looking to apply for a loan in the UAE Here are some ways to shield yourself from the ramifications on interest rates that fluctuate.

Get Pre-Approved

A mortgage pre-approval will give you an idea of the amount you are able to borrow and at what rates. A pre-approval can help you set a reasonable budget and proves that you're serious about selling to sellers.

Opt for Fixed Rates

Although variable-rate mortgages can be lower, they can be more risky in an environment of rising rates. Fixed-rate mortgages lock in the rate you pay for a predetermined time that gives you security.

Reduce Your Debt

The less debt you carry the higher your chance of being approved. Get rid of auto, credit card or personal loans prior to applying for a mortgage.

Save for a Larger Down Payment

A larger down payment can reduce the amount of money you'll need to borrow. It will make it easier to get approved and reduce your monthly payments.

Explore the options

Different banks have different rates and conditions. Don't take the first deal you receive. Compare different options to find the most competitive price.

Conclusion

A well-planned preparation will help you navigate the ever-changing rate of interest, regardless of whether rates are increasing or decreasing. Find out how banks assess your application, improve your financial standing and stay on top of changes in the market. In this way you'll be in a better position to get a mortgage. 

Rate fluctuations may appear to be a problem, but they're also a chance to reevaluate your finances, rethink your plan, and determine the most effective way forward.

Are you ready to turn your dream of homeownership into a reality? Get in touch with Us today to find the most suitable mortgage options that meet your requirements