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Those looking to buy a property may want to consider opting for a fixed home loan for next year to maintain a steady monthly payment
Economists say UAE residents will have to pay more for mortgages, credit cards and personal and car loans next year as central banks in the United States and the UAE are set to raise interest rates further.
The Fed raised its benchmark interest rate seven times this year from 0-0.25% to 4.25-4.50%, the highest level in 15 years, to rein in inflation that climbed to 9.1% this summer. The UAE central bank has also raised the base rate applicable to the overnight deposit facility (ODF) from 1.5% to 4.4% in 2022 as the UAE dirham is pegged to the US dollar.
Century Financial chief investment officer Vijay Valecha expects the Fed to raise interest rates to 5.1% in 2023 and then end its battle with runaway inflation.
“This would bring the benchmark rate to a target range of 5.0-5.25%. In fact, according to the dot plot, seven of the 19 committee members expect rates to rise above 5.25% next year. As the U.S. federal funds rate rises, The overnight deposit facility (ODF) benchmark rate in the UAE could also rise by 65-75 basis points to 5.0% in 2023 as the dirham is pegged to the dollar,” Valecha said.
Naeem Aslam, chief market analyst at AvaTrade, said investors are most concerned about how far the Fed’s interest rates will go. “From their tone, it’s clear that the Fed isn’t afraid to keep raising rates and a recession remains the least of their concerns as they want to bring down inflation at all costs.”
Daniel Richards, Mena economist at Emirates NBD Research, said the market remained more dovish on the outlook for ratings, with traders expecting the fed funds rate to peak at 5.0% in the first half of 2023, followed by two rate cuts in the second half of the year, bringing the benchmark interest rate down. Back to 4.5 percent by the end of next year.
Fixed or floating rate for UAE residents?
Vijay Valecha noted that UAE residents with floating rates rather than fixed rates will be affected by the rate hike.
“The 3-month Eibor rate in the UAE was 0.5% in early 2022, compared to over 4% today. All types of variable loans including personal, auto and home loans will see 3.5%,” said Century Financial’s chief investment officer difference.
For borrowers on fixed rate home loans, there should be no changes to their mortgage payments until the end of the fixed rate period. Borrowers on variable-rate mortgages, however, will feel the change next month when payments are due.
“Looking forward, if the Fed sticks to its median forecast, mortgage rates on new lending will certainly rise by at least 75 basis points.”
Once the UAE central bank raises rates, credit card rates usually follow suit, usually within a billing cycle or two, he said.
“Credit card interest rates in the UAE are already very high at 2.5-3% per month, which equates to 30-36% per annum, and when the central bank raises rates by 50 basis points, your bank may increase your APR to 30.5-36.5% ,” Valecha added.
Fixed loans for homebuyers?
With many economists predicting a recession in 2023, the Fed could turn in the second half of next year. Therefore, Valecha suggests that those who want to buy a house can consider choosing a fixed loan for next year to maintain a stable monthly payment.
“Thereafter, they should retain the variable rate option, or they must have the ability to refinance their mortgage to benefit from a lower rate environment at a later date,” he said.
Refinancing Options
UAE banks have been offering refinancing options to ease monthly payments as interest rates rise.
“Thus, businesses planning to refinance their debt now are best off with floating rate loans, as interest rates are expected to fall in the medium term. time, so a fixed-rate loan would make more sense.”
“As credit card debt can become expensive, people may consider paying off as much as possible or taking out a personal loan with a lower interest rate to reduce their monthly expenses,” he added.
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