Less than a month ago, the UAE Central Bank cut its key policy rate by 0.25 percent. This move mirrored the US Fed’s decision to slash interest rates by a quarter point. Its second rate cut this year.

Since July 31st 2019, when the first rate cut was announced, the 3-month EIBOR has gone down 11 percent – From approximately 2.6 percent to 2.3 percent. To put things into perspective, the 3-month EIBOR forms the basis of most lending rates in the UAE – Personal loans, car loans and most importantly, home loans.

What does this mean for borrowers?

Borrowers have all the reasons to celebrate. Interest rates on loan products are set to go down, given the downward trend in EIBOR.

The most significant impact would be on mortgages. Lower rates will make home finance more affordable for potential homeowners. This will also help ease the interest burden on existing borrowers. 

For existing borrowers, converting from a fixed-rate interest structure on to a variable-rate one would make obvious sense. It would allow them to cut mortgage costs in a falling interest rate environment.

Interestingly, a low interest rate scenario would make mortgage refinance more popular too. Refinancing your existing home loan means replacing your current loan with a new one, in order to take advantage of lower interest rates. This can help you in three ways…

  1. Making your mortgage installments smaller and giving you added liquidity.
  2. Reducing your mortgage term and bringing you closer to 100 percent home ownership.
  3. Allowing you to tap into your equity in the property, if you need the extra cash for other purposes.

[Related: How I saved over AED 100,000 on my home loan!]

What does this mean for the economy?

Regulators reduce policy rates to spur borrowing and economic activity, in the face of lackluster economic growth. With potentially lower borrowing costs in the UAE, the country’s property market is set to get a much-awaited boost too. At the moment, the UAE housing market is brimming with great deals on ready and off-plan properties. Lower interest rates, coupled with lower closing costs on mortgages, could be just the stimulus needed to rev up the property market and the UAE’s economy.

[Related: Is ‘lifestyle inflation’ dragging your savings down?]

What does this mean for savers?

Not all news is good news, is it? While lower rates bring respite for borrowers, they also translate into lower returns for savers. Savings and deposit accounts had just started to offer better returns in the last two years. In fact, previously increasing interest rates brought in some very interesting high-yield savings and deposit account options for savers to choose from. Unless banks take the hit without passing on the rate cuts to savers, lower rates will expectedly dull the shine on these products.

And with any further cuts in the returns on savings products, UAE residents will barely be able to beat inflation, let alone make a pretty penny on their savings.


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