For anyone coming from Europe and looking to secure a mortgage to buy property in Dubai or the rest of the UAE, comparing mortgage interest rates between the two locations can result in confusion. Often at Mortgage Finder, we are asked why the interest rates here are higher than European equivalents, when the credit history and other factors remain the same.
The over-simplified answer becomes ‘because they are different places’, but that’s unsatisfying and frustrating. In this article, we look deeper into the root causes and provide an overview that properly answers the question.
EIBOR vs. LIBOR – how interbank lending affects the market interest rate
All mortgage lenders in the UAE tie their interest rates closely to EIBOR, the Emirates Interbank Offered Rate. This rate is the standard charged by UAE banks when lending money to a rival institution – often banks must borrow money from each other and without a unifying rate in place to help govern these transactions, the market would suffer from instability and stifled growth.
EIBOR itself is a system modelled on LIBOR, the London Interbank Offered Rate, that came into being during the 1980s to standardise market trading in the financial centre. A third rate, EURIBOR, performs the same function across most of Europe.
Just as mortgage lenders in the UAE use EIBOR as a baseline for calculating their own interest rates for customers, so too do those in Europe look to EURIBOR as guidance and in the UK they depend upon LIBOR. However, despite being based on similar models, the three rates are completely independent and circumstances that affect the changes in LIBOR or EURIBOR may not apply to EIBOR and vice versa.
Dollar pegging – how the UAE dirham maintains an international exchange rate
The AED (UAE dirham) is pegged to the USD (US dollar). This is a method of tying the two currencies together in an international market and means that what happens to the USD in terms of international currency exchange will apply in equal measure to the AED.
Thus, when the dollar is strong in the market, so too will be the AED, and where the USD suffers, the dirham will follow.
This pegging means that events that affect the American market have a much stronger influence on the Emirates market than similar events in Europe.
Interest rate affecting situations – the part politics plays
Events that cause major upheaval for one nation do not necessarily influence another.
The 2007/08 global financial crisis
In 2008, the global financial crisis saw many countries enter a period of recession – America and much of Europe included. Many other countries, of which the UAE was one, were able to weather the storm better and enjoyed a period of GDP growth even as markets in Europe and the US suffered.
Each country’s governments dealt with the crisis in a different way. In the UK, for example, interest rates were cut significantly and a base rate from the Bank of England of 5% in early 2008 dropped to hit an astonishing low of 0.5% in March 2009. In the years since it has hardly seen any growth and stands at 0.75% as it has since August 2018.
This low rate has a huge impact on mortgage lending in the UK, where interest rates are considerably lower than many other international markets, including in the UAE – this means cheaper borrowing for those looking to own property in Britain.
Brexit
The financial impact of Brexit is yet to be seen in its entirety, but the consequences for the UK and the rest of Europe are significant. Britain has suffered a considerable drop in the strength of sterling compared to the dollar and these exchange rates and other factors have a knock-on effect for LIBOR that is not reflected for the EIBOR equivalent.
The steady rate held by the US Federal Reserve Bank
In the US, the Federal Reserve Bank announced that they would not be raising interest rates for the coming year, holding steady at 2.25% to 2.5%.
This reflects a slowing of growth in the US, with household spending down and business investment showing a more cautious outlook.
The pegging of the AED to the dollar means that this rate stabilisation has a direct impact on EIBOR, keeping interest rates steady and improving the outlook for those seeking mortgages in the region – in fact, there has been a notable decrease in UAE mortgage rates since the announcement.
Yet, just as Brexit has little impact on American markets, this news is of far more significance to the currency-tied UAE than it is to Europe.
Because they are different places – advantages of a globally diverse market
‘Because they are different places’ is a flippant answer to the question, but it’s also the core truth. Cultural factors, national growth and even the good weather can influence the cost of borrowing in a country.
There are a huge number of differences in everything from wildlife to real estate in the UAE when compared to countries like England, Germany or the Netherlands – making both life and mortgage interest rates a bit of a culture shock! But never in a bad way – just different.
Interested in the opportunities presented in the UAE? Why not use our mortgage calculator to get an idea of the real cost of a mortgage?
Looking at everything – when focusing on the interest rate becomes a loss of vision
It’s easy to see the interest rate as the be-all and end-all of mortgage calculation, but it’s only one part of the picture, and focusing on it to the exclusion of other factors could result in you getting a mortgage that’s far more costly than you first thought.
Our article, Why the interest rate is NOT the most important aspect of a mortgage, gives you an in-depth look at the financial implications of some of your mortgage terms and conditions and lets you see the bigger picture, making it essential further reading.
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