Will the latest interest hike spike your dream of buying a home?

On Wednesday July 27, we witnessed another interest rate hike from the US Federal Reserve, followed shortly by the UAE Central Bank hiking the rates within the country. Did it come as a surprise? In short, no.

In June, US inflation hit a 40-year record with consumer prices increasing 9.1 per cent over the last 12 months. We’ve had multiple interest rake hikes already this year, and the latest increase of 75-basis points comes as no surprise. With two consecutive 75 basis point hikes, it supports the US Federal Reserve’s stance on being resolute in curbing inflation and front loading the increases.

But what does this mean to the everyday homebuyer or investor in the UAE? We can look at this from two perspectives. First, the direct impact on mortgages. Second, the indirect impact on outstanding debt and how this impacts an individual’s budget and affordability. For the former, looking back, we’ve been through a period of relatively low interest rates over the past few years, thanks to Covid-19. This naturally resulted in many buyers perceiving the current rates as astronomically high, when in fact they are not.

Pre-covid, the average fixed rate mortgage was around 4 per cent. During the height of the pandemic, rates dropped to sub 3 per cent. However with the latest Fed increases, as per Holo.ae, we expect to land just shy of 4 per cent with a 3 year fixed rate. Although fixed rate mortgages are getting harder to come by as banks proceed with caution, they are out there and knowing one’s payments are fixed for the foreseeable future, it allows buyers and investors to plan better financially. A plan that terminates the worry of having to pay an extra sum of thousands of dirhams as mortgage payments with little knowledge of when they will come back down.

For those actively searching for a home now, the cost of mortgage payments may appear to be steep, however the alternative is to stay in the rental market. A market which is also up by 20 per cent year-on-year and continues to rise. So although it may be a tough pill to swallow, buying now and holding for numerous years means that one is at least paying into their own asset, and not somebody else’s.

Looking at the latter impact, increasing interest rates are being felt across all of an individual’s outstanding debt. Increasing car loan repayments, credit card debt and other debts are also impacting an individual’s disposable income and affordability when looking to buy. In recent months, there has been evidence that buyers are adjusting their budgets and are not willing to meet the demands of sellers in the villa market. As villa prices have increased by 20% year-on-year, we’re now seeing villa activity soften and prices stabilise. This has drawn a great deal of attention to apartments which have not experienced the sharp price increases like villas, resulting in buyers making trade-off decisions – do they need the extra bedroom? Do they need the backyard?

When looking into the off-plan market specifically, inquiries and transactions are remaining high as the model offers investors and end users the chance to buy without the added pressure of current interest rate hikes. For units handing over in 2024/2025 for example, we’d expect interest rates to be relatively lower, so buyers looking to mortgage the post-handover amount could be in a much better position to do so.

Sarah Hewerdine is the Head of Marketing at houza.com