Why the low interest rate environment is spurring UAE residents to refinance mortgages

Dubai resident Nilesh Jain switched his mortgage provider last year after realising he was paying 2.5 per cent more than the prevalent market rate for home loans in the UAE. He was paying a hefty 6 per cent interest rate to Dubai Islamic Bank for his mortgage, compared with the average market rate of about 3.5 per cent in 2020. The Indian expat had originally taken out a Dh2.25 million mortgage for his Arabian Ranches villa from Tamweel in 2007. In 2010, he transferred the remaining mortgage amount of Dh1.7m to Dubai Islamic Bank for a cheaper interest rate. In 2020, he switched banks again, moving his now Dh1.18m mortgage to Rakbank, which offered a product that links a borrower’s current account balance to their home loan facility to reduce the balance they are charged interest on. "With DIB, my monthly EMI was around Dh13,000. Now my mortgage EMI with Rakbank is only Dh3,500," the business re-engineering consultant tells The National . Mr Jain is now paying a fixed interest rate of 3.89 per cent for three years after refinancing his mortgage with Rakbank. He has also taken out a new mortgage to buy a villa in Al Furjan in Dubai for the same interest rate. “I am in talks to reduce the interest rate on both my mortgages because the market rate is lower. If the bank does not agree, I will move them both to another lender,” he says. The property owner says he made considerable savings by refinancing his mortgage. However, he paid a few charges such as a settlement fee to the old lender, property valuation fees of Dh3,000, a mortgage de-registration fee with the Dubai Land Department, a mortgage registration fee, a DLD title fee and a service fee. “People think moving a mortgage is a hassle, but it can actually be done in two weeks. A little bit of research and talking to others who have gone through the process will help,” Mr Jain adds. The main reasons borrowers choose to refinance mortgages are to get a more competitive rate or to find a new fixed-term rate. In most cases, when the borrower reaches the end of a fixed term, the mortgage rate tends to increase as they move to the reversion rate. So, they refinance to move onto a more competitive rate, says Brendan Kennelly, senior mortgage consultant at Mortgage Finder. Other borrowers choose to refinance to lock into another fixed-term rate. A fixed-term rate gives borrowers security for a set period, be it three or five years, so they know that their mortgage repayments will remain the same for that time and enable them to better plan their finances, according to Mr Kennelly. “For those borrowers who are still within a fixed rate term, in some instances it could still be worth refinancing if you are on a much higher rate of interest in comparison with what is currently available on the market,” says Mr Kennelly. “The fees to refinance and move the mortgage during the fixed rate period or afterwards are the same. Meaning, it could be worth refinancing it earlier rather than waiting until the fixed-rate term ends.” With the US Federal Reserve announcing in late 2020 that interest rates are likely to remain near zero for the next five years, the low interest rate environment is set to also continue in the UAE. The historically low mortgage rates in the Emirates have spurred homeowners to refinance their mortgage or purchase property. “Mortgage rates for residents can be as low as 2.17 per cent on a variable rate basis and range between 2.39 per cent to 2.99 per cent for the best fixed-rate products,” says Mr Kennelly. “This has fallen from about 3.75 per cent, which was the leading fixed rate product in 2019.” There are no indicators that interest rates will increase anytime soon but they also cannot fall much lower than where they currently sit, according to Arran Summerhill, company director at Holo Mortgage Consultants in Dubai. He says customers should lock in good deals by switching their loans to a cheaper option or at least get a free quotation to ensure they get the best possible rate. It also helped that the Central Bank of the UAE increased the maximum loan-to-value ratio for expats from 75 per cent to 80 per cent last year. “They may have been tight on equity in the property previously, whereas this extra 5 per cent has opened the option of refinancing up to more people,” Mr Summerhill adds. Mortgage Finder says it has been receiving refinancing enquiries on a regular basis from both new and previous clients. Around 85 per cent of refinance enquiries in 2020 were from end-users and 15 per cent from investors, according to the consultancy. Meanwhile, at Holo, 37.4 per cent of applications through the consultancy were to refinance an existing property. This was made up of 28.6 per cent looking to switch their current deal to a better rate, while 8.8 per cent were looking to release equity from their property, which was fully paid in cash, Mr Summerhill adds. Egyptian expat Yahya Mahmoud also made considerable savings by refinancing his mortgage for his villa in Arabian Ranches. The fixed term on his mortgage with Commercial Bank of Dubai was ending and he negotiated a lower rate with a different lender. The original mortgage taken out six years ago was worth Dh3.15m. “The old fixed rate was 3.95 per cent. It was due to increase to 3 per cent plus six months' Eibor, which meant it would increase to approximately 5.3 per cent with CBD. That’s why I switched lenders,” Mr Mahmoud says. He refinanced his mortgage with Standard Chartered last year on a new fixed rate of 3.55 per cent for two years on the outstanding balance of Dh1.965m. With the new mortgage, the interest is calculated on the difference between the outstanding balance minus whatever funds are in the account, thus reducing interest paid over the life of the mortgage and yielding additional savings. “Even when I factor in the early settlement charges of Dh10,000 with the old lender, valuation fee of Dh3,000, mortgage discharge fee of Dh600 and mortgage registration fee of a little more than Dh4,000 with the DLD, I’m still saving money. I will save Dh69,000 over the two-year term including insurance savings,” the consulting and technology executive adds. He suggests those taking out a mortgage to cap early settlement charges with their lender at either 1 per cent of the outstanding loan amount or Dh10,000 (whichever is the least), as per UAE Central Bank regulations. In some instances, it is not worth refinancing if the exit fee is substantial. He adds that customers must look beyond the headline interest rate and factor in other components to the mortgage, such as property insurance and life insurance premium, and compare this with their current mortgage. “Check whether you are required to pay for life insurance," Mr Mahmoud says. "If it is required, check whether you have to get it through the bank or you can get your own. "My old lender required the bank to directly provide a life insurance coverage that cost 0.33 per cent annually, which didn’t make sense for my circumstances because I had my own life insurance policy, a portion of which I could assign to cover the mortgage. The new lender did not require a life insurance policy, which meant I saved more money, close to Dh6,700 annually.” In general, the costs involved in switching a mortgage are the settlement fee on the current loan, the valuation on the new property, potential bank fees, DLD costs to register the mortgage and the payment to the trustee/transfer office. It’s also worth considering how long the homeowner plans to keep the property. “There is no point in calculating the savings over 20 years if you plan to sell the property in only five years. If the savings you can make over the term you retain the property outweigh the costs of switching the loan, then generally it is worth considering,” Mr Summerhill says. Sarah Feilder decided not to move her mortgage to a new lender after calculations made her realise that the cost to refinance was equivalent to six weeks of the mortgage repayment. The Briton, who owns a renewables business in the UAE, did not see the benefit of paying around Dh35,000 in transaction fees to transfer her mortgage for a property in The Villa community in Dubailand. Ms Feilder originally took the mortgage from Rakbank five years ago and then switched to Abu Dhabi Commercial Bank after two-and-a-half years to get a better fixed rate. This rate ended in September last year and the interest was scheduled to rise from 2.85 per cent to 5 per cent. Although First Abu Dhabi Bank offered her a home loan at an interest rate of 2.99 per cent for three years, she realised that moving her mortgage a second time would be expensive and decided to stick to her existing lender. After lengthy negotiations, ADCB offered her a variable rate of 3.49 per cent. “Watch out for what happens at the end of the fixed term of your mortgage. See if you can get the bank to negotiate before you move elsewhere,” she says.

Why the low interest rate environment is spurring UAE residents to refinance mortgages

Homeowners are increasingly negotiating with lenders for more competitive rates