UAE mortgage rates not expected to fall

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The UAE's home finance companies and banks may not lower their mortgage rates as the Emirates Interbank Offering Rate, or Eibor, has been going up, a senior official at one of the leading home finance companies and mortgage providers told Emirates Business.

"Although there was a sharp but temporary drop in Eibor, in correlation to a drop in United States Federal Reserve rates, the credit spread over Eibor has widened primarily due to the global credit crisis. We have witnessed that Eibor has been steadily increasing in the past few weeks. Therefore, the overall cost of funds did not reduce significantly," said Arif Alharmi, CEO of Amlak Finance.

The increase in Eibor - in contrast to the Fed rate - reflects tighter funding constraints in the market, leading to higher lending rates for customers. In keeping with its peg to the dollar, the UAE Central Bank had matched every rate cut by the Fed since November 2007, causing inter-bank rates to drop from 4.94 per cent to 1.9 per cent by April 2008, with mortgage rates ranging between 4.9 and 7.94 per cent, boosting the market's growth, according to a report by EFG-Hermes.

However, this is no longer the case as the market faces tight liquidity. "The UAE's underlying economic indicators and dynamics are very different from the US and hence the Fed's rate movements do not generally have the same impact in both countries," said Alharmi.

Despite the high mortgage rates, no dramatic shift is expected even as Dubai's property market gradually moves to become a buyer's market. "The rates are also driven by the wholesale liquidity in the market and the overall cost for raising funds by the banks and finance firms. The overall cost of funds has increased over the past few months due to the global credit crunch," said Alharmi. "Generally, it can be concluded that with more completed property coming on to the market, the need by home owners for mortgage finance ought to increase, which should in turn help maintain current rate levels."

Home finance seekers can expect relief in the face of competition among an increasing number of mortgage providers in the future. "We believe competition among existing and new mortgage finance providers will increase," said Alharmi.

By Shuchita Kapur

© Emirates Business 24/7 2008