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“The UAE is a market that desperately needs credit…” According to the UAE Central Bank, banks must immediately notify customers of any changes in their prevailing interest rates. “Current market rates are between 3% and 4% per month,” Akberali said. The worst affected will be consumers who have to pay off credit card bills and mortgages, Akberali said.
“People with floating rate contracts are mostly in the mortgage space,” he added.
For example, if an individual earns Dh20,000 per month and the monthly mortgage payment based on a variable rate is Dh10,000, successive interest rate hikes by the UAE Central Bank will push home loan EMIs up to Dh12,000. “For that Emirati consumer, the remaining disposable income has gone from Dh10,000 to Dh8,000,” Akberali said. “Even so, the individual will not reduce his or her spending – they will use a credit card to make up the balance of Dh2,000.”
Additionally, each card has an interest-free grace period, usually 15-45 days after purchase. If consumers don’t pay the outstanding amount on the card on or before the due date, or pay only the minimum amount, the debt cycle can easily get out of hand. That’s why managing outstanding credit cards is so important. Another option for UAE consumers who also hold a mortgage is to refinance the deal with another bank over an extended fixed annual payment term.
“Currently, the average monthly interest rate is between 2.2% and 2.8%,” said Neelam Verma, vice president and head of investment at Continental. “So adding 75 basis points makes credit borrowing a rather expensive proposition.” (Also, if the rate goes into the variable rate phase, the mortgage EMI will increase.) “For new borrowers, it is advisable to look for a fixed rate so they can lock in (maximum duration, thereby protecting them from impending rate hikes),” Neelam said. Shivansh Rachit, board member of Hedge & Sachs, has similar advice for UAE consumers. “Credit card debt is a never-ending cycle. The impact of rate hikes will be felt for the next two or three months” if rates are raised monthly. Rachit said it would be wise to settle the balance as early as possible. “Check with the bank for repayment flexibility and EMI options for outstanding payments,” he said. Then, it would be good if individuals were in control of their spending.”
While paying the minimum balance would bring temporary relief, he said long-term payment obligations would continue to increase. UAE consumers are advised to continue to take a close look at their profit and loss statements – and reduce their debt load where possible.
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