While many may not know what the Emirates Interbank Offered Rate (EIBOR) is, it’s something homeowners are going to become increasingly familiar with in coming months. Why? Because it can have a direct effect on their mortgage rate.
What is EIBOR?
Put simply, it is the interest rate charged by banks in the UAE for interbank transactions, i.e. if one bank needs money, it will often look to a second bank with excess funds to borrow from. The second bank will be happy to lend as it will profit from the transaction. To ensure stability in the market, the rate at which the second bank lends to the first is based on the EIBOR.
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How is it calculated?
The UAE Central Bank sets the rate, publishing the current rate on its website every business day by 11am. The rate is calculated as an average of 11 UAE banks – they submit their daily rates and the two highest and two lowest are removed and an average taken of the remaining rates.
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Why is it important?
This rate is commonly used as a benchmark by lenders for financial transactions, particularly mortgages. Therefore, if the EIBOR goes up, lenders are likely to pass that increase onto customers. Similarly, if it goes down, that drop is again passed on.
Most banks clearly state that their variable mortgage rate is based on the EIBOR; this is usually on a quarterly basis. In December, the 3-month EIBOR had gained 17 percent to 1.024 percent. This has risen further since with the rate on January 7 at 1.055 percent.
In fact, the rate has been rising steadily for a number of months. Experts have attributed this to two factors: firstly to anticipation in the run up to a key decision made in December by the Federal Reserve – the central bank of the United States and the most powerful financial institution in the world. It raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent – it is the first increase in almost 10 years with more hikes expected in coming months. But experts have also attributed the EIBOR’s rise to tightening liquidity in the UAE banking sector due to declining bank deposits.
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So, how will this affect mortgages?
With most UAE home loans benchmarked to EIBOR, the days of declining mortgage costs may be over for now. This is because a bank typically adds 3 to 5 percentage points to EIBOR to calculate the rate it offers bank customers – many mortgages now typically range between 4 and 7 percent.
It will have the most effect on those that have taken out mortgages with variable rates – they will see increases in their monthly repayments. Those with fixed-rate mortgages – where the rate has been locked in for a period of time – will be unaffected until that fixed-rate period expires.
Have any banks passed increases onto customers yet?
Yes. HSBC Middle East raised its mortgage rate this month by just under a quarter percent from the start of the month. HSBC starting reducing rates are based on 3-month EIBOR and have gone up from approximately 0.8% to 1.05%. Standard Chartered has also raised rates with other lenders expected to follow soon. Standard Chartered starting reducing rates are based on 12-month SCB Lending Rate and have gone up from 3.49%% to 3.75%.
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How will this affect the personal finances of residents?
In an era of already increasing living costs, it will make paying for a home more expensive, leaving homeowners with less disposable income in their pocket. Higher interest rates can also be a dampener for the property market, with valuations lowering to factor in the higher cost of borrowing.
The rates used for general loans can also be affected, therefore those looking to borrow in 2016 may have to pay more for personal finance. Islamic banks, in particular ,use the EIBOR rate to determine the rental rates for special leasing agreements known as Ijara. But on a plus note, if interest rates are on the rise savers can benefit too as long as banks pass the increase onto savings accounts and fixed deposits.