How Interest Rate Changes Impact Mortgage Approvals in the UAE

Securing a mortgage is often the biggest hurdle when buying a home in the UAE. It is not just about finding the right property but also navigating the financial system that supports homeownership. One key player in this system is the interest rate. Changes in interest rates ripple through the mortgage market, shaping the decisions of buyers, banks, and regulators. But how exactly do these changes influence mortgage approvals in the UAE? Let's break it down.

What Is an Interest Rate?

Interest rates are the price of borrowing funds. When you borrow money from a bank using a mortgage, the interest rate will decide how much more you will pay the bank for the duration of the loan. The maximum duration of the mortgage loan is 25 years. For instance, if you borrow AED 1,000,000 with an interest rate of 3% for 25 years, your repayment amount will be less than if it were 4%. That difference of 1% might not sound like a lot, but it makes a big difference, particularly in an economy like the UAE, where house prices are so high and mortgages tend to go into millions.

How Interest Rates Are Set in the UAE

The Central Bank of the United Arab Emirates (CBUAE) sets the interest rates in the UAE. The United States Federal Reserve heavily influences mortgage interest rates. Why? Because the UAE dirham is pegged to the US dollar. When the Federal Reserve raises or lowers interest rates, the Central Bank of the UAE often follows suit. So, the global economic conditions, inflation rates, and monetary policies in the US all indirectly affect what UAE residents pay on their home loans.

Impact on Mortgage Approvals

When interest rates rise, borrowing becomes more expensive. It has a domino effect on mortgage approvals. Let's look at how:

Affordability Assessments Tighten

Banks in the UAE use a Debt Burden Ratio (DBR) to assess whether you can afford a mortgage. The DBR is the percentage of your monthly income that goes toward paying off debt, including your mortgage. A rise in interest rates can push your DBR above the allowed limit, usually around 50% in the UAE. If this happens, your mortgage application might be declined.

Let's understand this with an example. Suppose your monthly income is AED 20,000. You are applying for a mortgage with an estimated monthly payment of AED 8,000. If interest rates rise and your payment increases to AED 9,000, your DBR jumps from 40% to 45%. This raise might still be acceptable, but a further rate increase (above 50%) could push you over the threshold.

Please read: Your Mortgage Questions Answered: Everything You Need to Know

Reduced Loan Eligibility

Higher interest rates also reduce the maximum loan amount you qualify for. If a bank determines you can only repay AED 10,000 per month, a higher interest rate means a smaller portion of that payment will go toward the principal loan amount. In other words, you will be approved for a smaller loan. This can frustrate buyers who have already set their sights on a property only to find out they can no longer afford it.

Stricter Credit Criteria

Banks can tighten their lending standards to reduce risk when interest rates rise. They can raise credit score thresholds, increase income verifications, and tighten checks on current debt. Higher rates can make qualifying even more difficult if you have a spotty credit history or existing debt.

How Buyers React

A rise in rates can create uncertainty among the buyers. They may delay their plans. In 2022 and 2023, the UAE experienced a series of interest rate hikes as the Central Bank aligned with the Federal Reserve's tightening policies. Mortgage interest rates in the UAE rose from an average of 2.5% in 2021 to over 5% in late 2023. As a result, many middle-income buyers found it harder to qualify for loans. Some who had pre-approved mortgages revoked their approvals due to increased monthly payment requirements.

Tips for Buyers

If you are planning to apply for a mortgage in the UAE, here are a few practical steps to protect yourself from the impact of fluctuating interest rates:

Get Pre-Approved

A mortgage pre-approval gives you a clear understanding of how much you can borrow and at what rate. A pre-approval helps you set a realistic budget and shows sellers you are serious.

Opt for Fixed Rates

While variable-rate mortgages may start cheaper, they are risky in a rising-rate environment. A fixed-rate mortgage locks in your interest rate for a set period, giving you stability.

Reduce Your Debt

The lower your existing debt, the better your chances of getting approved. Pay off credit cards, car, or personal loans before applying for a mortgage.

Save for a Larger Down Payment

A bigger down payment reduces the loan amount you need. It can make approval easier and lower your monthly payments.

Explore your Options

Different banks offer different rates and terms. Don't settle for the first offer you get. Compare options to find the best deal.

Conclusion

Proper preparation can help you through the changing interest rate phase, whether rates are rising or falling. Learn about the way banks evaluate your application, enhance your financial standing, and keep abreast of market developments. By doing so, you will be in the best position to secure a mortgage. Rate changes may seem like an obstacle, but they are also a chance to review your finances, refine your strategy, and identify the optimal way forward.

Ready to turn your homeownership dreams into reality? Contact us today to explore the best mortgage options that suit your needs.