UAE mortgage holders get a break

source The National

Central Bank measures aimed at lowering interbank rates could give the depressed UAE mortgage sector a boost but will take longer to lower the cost of personal loans, bankers say.

That could be good news for homeowners across the Emirates who are saddled with expensive mortgages despite historically low interest rates around the world.

“As the Government wants to make Eibor more reflective of the market, it will impact the products most closely linked to Eibor and that will have a cascading effect through the economy,” said Venkatesh Srikantan, the international and regional head of assets and liabilities at HSBC Middle East.

Eibor, or the Emirates interbank offered rate, is the average interest rate that banks charge when they lend to one another.

Early this month, the Central Bank announced several actions to spur fresh lending, which included a new mechanism to set Eibor and extend the length of the repo facility, which allows banks to take out fresh funds for collateral.

“It is unlikely that these (Central Bank) actions will affect fixed-rate, long-term products, but we may well see changes where pricing is based on Eibor,” said Mr Srikantan.

Mortgages in the region typically have variable interest rates. Eibor plays a crucial role when banks review their mortgage rates, which typically happens every three to six months.

The Central Bank wants the Eibor rate to better reflect prevailing market conditions, while the Government would like to see banks lend more. But banks have been reluctant to do so, partially because their deposits still trail the Government’s requirements for lending.

Lending in the UAE has only picked up slightly after coming to a standstill after the Lehman Brothers collapse.

Banks’ liquidity constraints have also kept Eibor rates stubbornly high, although they have come down significantly from their peak of about 4.8 per cent in October.

Three-month Eibor was 2.1688 per cent on Thursday. The comparable Saudi rate was at 0.64 per cent. The official repo rate stood at 1 per cent.

A falling Eibor is unlikely to immediately translate into cheaper personal loans because they have fixed interest rates set for the entire period of the loan.

“Consumer lending is not directly related to market rates and to what happens to Eibor,” said Arup Mukhopadhyay, the head of retail banking at Abu Dhabi Commercial Bank (ADCB). He said that factors such as market conditions, availability of credit, customer profiles and requirements played a larger role for personal loans than Eibor.

But mortgage rates could fall as a result of the Central Bank’s actions, observers said.

“If the cost of mortgages become cheaper, more people will tend to look at mortgages. That will definitely impact property demand,” said Mr Srikantan. “If (mortgage) instalments are more palatable, more people tend to look” at buying property.

The Central Bank plans to introduce next month a new mechanism to determine Eibor. It is expected to change the number and composition of the panel that submit their rates. Currently, 10 local and foreign banks submit their rates and the average of eight is calculated, excluding the highest and lowest figures.

In another step aimed at encouraging banks to use the facility more, the Central Bank on Wednesday extended the period of its own overnight repo rate to one month from one week.

The repo facility allows banks to “park” certain types of collateral with the Central Bank while they can take out fresh funds that they can then use at their discretion.

Since October, the Central Bank has offered banks Dh120 billion (US$32.67bn) in emergency lending facilities and additional deposits. In a separate move, Abu Dhabi injected Dh16bn of Tier 1 capital into five local banks.