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UAE: Loans, mortgages set to get cheaper as interest rates likely go down

The widely expected rate cuts by the US Federal Reserve will be the first time in three years

Borrowing costs will drop this week in the UAE as the US Federal Reserve and Central Bank of the UAE (CBUAE) are widely expected to cut interest rates, making it more affordable for consumers to obtain personal, auto, and mortgage loans.

With the dirham pegged to the dollar, the UAE will most likely match the interest rate cut as that of the US after the September 18 meeting.

This will be the first time in the past three years that the interest rates will be reduced. The UAE cut interest rates between the middle of 2019 and the middle of 2021 following the policy engaged by the US Federal Reserve. During this period, central banks adopted a softer monetary policy to alleviate the impact of the coronavirus on the economy.

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The last change in the UAE monetary policy came on July 27, 2023, when the CBUAE raised interest rates by 25 bps from 5.15 per cent to 5.40 per cent, following the 25 bps increase in the US Fed Fund rate from a day prior.

How much rate cut is expected?

Most analysts expect central banks will reduce rates by 50 basis points on Wednesday.

“The UAE is most likely going to follow in the footsteps of the Fed, which is expected to cut rates by 50 bps with a 67 per cent probability as per the CME FedWatch tool. The odds of 25 bps have fallen to 33 per cent compared to 66 per cent from a week ago,” said Vijay Valecha, chief investment officer at Century Financial.

George Pavel, general manager at Capex.com Middle East, said the UAE Central Bank could adopt the same cut size.

“While expectations have been constantly shifting between both options (25 bps and 50 bps), markets are increasingly pricing in a 50 basis point cut due to the direction the US economy is taking and the concerns about its strength. But ultimately, markets will remain focused on the Fed, its economic projections, and its decision,” he said.

Mazen Salhab, chief market strategist for Mena at BDSwiss, said a 25 bps cut is seen as a balanced move to provide economic stimulus while maintaining market stability. Still, there's a notable possibility of a larger 50 bps cut.

Benefit for consumers

Salhab sees borrowing becoming more affordable as interest rates on personal loans, mortgages, car loans, and credit cards will likely decrease on Wednesday. “This could lead to lower monthly payments on new loans, increasing consumers' purchasing power. Mortgage rates are forecast to be lower in 2024, potentially making home buying more accessible and stimulating the real estate market. Existing borrowers may have opportunities to refinance at lower rates.”

George Pavel added that interest rate cuts may induce a decline in rates applied to new personal and mortgage loans and loans with variable rates. “As a result, borrowers could benefit from cheaper loans and lower interest rates for refinancing existing loans. They could also see more decreases in interest rates if the central bank continues to lower rates as expected in the coming months.”

With interest rate reduction, Valecha said that a decline in interest rates results in lower costs for various products, including credit cards, mortgages, and personal loans. “This is significantly impactful for mortgages, as reduced rates make home financing more accessible and affordable for prospective buyers.”

Benefit to existing borrowers

Existing borrowers with variable interest rate debt can take advantage of falling rates, resulting in lower monthly payments, said chief investment officer of Century Financial.

“Additionally, borrowers who can switch from a fixed-rate to a variable-rate loan may also benefit from reduced costs if interest rates are declining, as this could lead to savings in a more accommodating monetary policy environment. For those with existing home loans, refinancing during a period of low interest rates can be advantageous. By replacing their current mortgage with a new one at a lower rate, borrowers can reduce their interest expenses and ease the financial burden of their existing debt,” he said.

Echoing his industry peer, Pavel added that borrowers in UAE with variable-rate loans would be the main immediate beneficiaries of an interest rate cut as their banks could apply a decline in the cost of borrowing. “Credit card users could also see an impact on the level of interest they could be paying.”

Mazen Salhab said interest rates on monthly payments will likely decrease automatically for borrowers with variable rates. Borrowers with fixed-rate loans won't see immediate changes but may benefit by refinancing at lower rates.

Rise in demand

With interest rates expected to decline on multiple occasions during the coming months and the strong local economy, the UAE could see increased demand for personal and mortgage loans and other forms of financing. “Lower financing costs could help drive more consumption as well as investment in real estate which remains an appealing asset class,” he added.

Interest rate cuts lead to higher demand for loans, including personal and mortgage products as lower rates make borrowing more accessible and affordable for consumers.

“As mortgage rates decrease, more individuals may qualify for mortgages, potentially enabling them to secure higher loan amounts and improving overall affordability. Similarly, the decline in interest rates can lead to reduced credit card rates and car loan rates, which may drive up the demand for personal loans. This boost in borrowing could, in turn, stimulate greater spending activity across the economy,” added Valecha.

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