An overview of UAE mortgages when interest rates rise

Over the last three years, amidst global uncertainties, the real estate market in the UAE has demonstrated resilience. Factors such as low-interest rates, a substantial housing supply, and policies promoting long-term residency have fuelled increased interest in property acquisition within the country. While Dubai continues to dominate the local real estate scene, Abu Dhabi, Sharjah, and Ras Al Khaimah are also witnessing a surge in buyer demand. Despite the ongoing stability, the UAE dirham's peg to the dollar exposes borrowers to potential interest rate fluctuations driven by the US Federal Reserve's measures against inflation. Foreign investors, seeking security against devaluation risks, are opting for a trusted pegged currency.

With 11 rate hikes since 2022, homeowners, especially those with variable interest rates, have felt the impact. Nevertheless, compared to the United States, where home lending rates have exceeded 7%, reaching a 22-year high, financing a home in the UAE remains relatively affordable. While American homebuyers often choose 30-year fixed-term mortgages, in the UAE, fixed-term options typically span three to five years. Consequently, those approaching the end of their initial term or with variable rates are currently facing greater challenges. While a 0.25% rate increase may seem marginal initially, its cumulative effect over the years can significantly impact finances. Homeowners should, therefore, assess their existing mortgage terms, understanding any potential increase in payments. With one more rate increase anticipated before the year's end, homeowners need to maintain a long-term perspective. Any potential disruptions to payment schedules should be carefully weighed against the potential upside in property values and the growth of tax-free rental income.

The UAE stands out globally with rental yields ranging between 7% and 10%, offering a stable avenue for income generation. Additionally, the substantial capital appreciation of homes, reaching up to 100% over two years in some instances, adds to the attractiveness of the market. It is crucial for homeowners not to disrupt or default on payment schedules, as this can impact their credit profile. Instead, this period presents an opportunity for individuals to assess their capacity to meet additional costs and explore refinancing options with better terms, rates, and tenures.

As the Federal Reserve concludes its interest-rate increases, mortgages in the UAE are expected to stabilize or even decline. The combination of strong returns, a high-quality lifestyle, and affordable financing positions UAE homeowners favourably for choosing one of the world's fastest-growing property investment destinations.