UAE Interest Rates Drop: More Dubai Property Buyers Choose Mortgages Over Cash

Dubai’s Property Market Sees Shift Towards Mortgages as Interest Rates Decline

Dubai’s dynamic real estate market is experiencing a significant shift, as more property buyers turn to mortgages for financing their home purchases. This trend, driven by a reduction in interest rates both in the UAE and globally, marks a notable departure from the previous year when cash transactions dominated the market.

In its recent quarterly report for the third quarter of 2024, Betterhomes, a leading property brokerage firm, highlighted this change in buyer behavior. According to their data, over 60 percent of buyers during this period opted for mortgage financing, reflecting an 8 percent year-on-year increase in the number of buyers choosing this option. This shift in the market signals a broader transformation in Dubai's real estate landscape, as more individuals and families turn to mortgages to make their home ownership dreams a reality.

Why the Shift to Mortgages?

The primary driver behind the surge in mortgage buyers is Dubai’s relatively low interest rates, which have remained highly competitive in comparison to other global cities. As inflation cools across various regions, central banks have begun to reduce interest rates, making borrowing more affordable for consumers. This global trend has been mirrored in the UAE, where the Central Bank of the UAE recently announced a reduction in its Base Rate, signaling a more favorable borrowing environment for prospective homeowners.

“Mortgage buyers received a welcome boost in September with an interest rate drop of 0.5 percent, marking the first reduction in rates in over four years,” said Richard Waind, CEO of Betterhomes. “Cheaper mortgages in the face of rising rents have understandably resulted in an influx of new buyer inquiries from tenants.”

Waind's statement emphasizes that lower interest rates have made mortgages a more attractive option, especially for those currently renting and looking to transition into home ownership. The combination of rising rental costs and declining mortgage rates has prompted many tenants to consider buying homes as a more cost-effective long-term investment.

Increased Mortgage Education

One of the key factors supporting this shift towards mortgages is the growing awareness and education surrounding mortgage options. According to Lewis Allsopp, Chairman of Allsopp & Allsopp, the market is seeing a significant increase in buyers seeking independent mortgage advice before approaching banks. “We’re seeing a shift in the market towards better mortgage education, driving higher activity,” Allsopp explained.

This increase in mortgage education is critical in empowering buyers to make informed decisions about their financing options. By seeking independent advice, buyers can better understand their eligibility, interest rates, and loan terms, allowing them to choose the best mortgage product for their needs. This shift also highlights a broader trend in the UAE’s real estate market, where buyers are becoming more financially savvy and are taking the time to fully explore their options before making a purchase.

Impact of the UAE’s Rate Cut

The recent reduction in interest rates by the Central Bank of the UAE has played a crucial role in encouraging more buyers to opt for mortgages. Following the US Federal Reserve’s decision to cut rates, the UAE’s central bank reduced the Base Rate applicable to the Overnight Deposit Facility (ODF) by 50 basis points, from 5.40 percent to 4.90 percent. This move has had a ripple effect across the UAE’s financial sector, resulting in lower interest rates on personal loans, mortgages, and auto loans for consumers.

For prospective home buyers, this rate cut represents an opportunity to secure more favorable mortgage terms. Lower interest rates mean reduced monthly payments, making home ownership more accessible to a broader range of buyers. In addition, the rate cut is expected to boost overall economic activity in the UAE, as more individuals and businesses take advantage of cheaper borrowing options to finance their investments and expansions.

A Surge in Tenant Interest

The latest data from Betterhomes’ Future of Living Survey reveals that nearly 7 out of 10 tenants in Dubai — 67 percent — have expressed a desire to purchase a home within the next three years. This finding underscores the growing aspiration among tenants to transition into home ownership, particularly as mortgage rates continue to decline.

Waind commented on this trend, stating, “The lower interest rate environment will support that aspiration.” For many tenants, buying a home presents an opportunity to escape rising rental costs and secure a long-term financial investment. The combination of competitive mortgage rates and increasing property prices in Dubai has made purchasing a home an appealing option for those who want to build equity over time.

Impact on the Real Estate Market

As mortgage rates ease and more buyers gain access to affordable financing, the market for ready properties in Dubai is expected to see a significant uptick in activity. However, this will depend largely on how sellers respond to the changing market conditions. According to Property Finder, a leading real estate platform and subsidiary of Cavendish Maxwell, the increase in buying power resulting from lower mortgage rates could lead to a bump in property sales, provided that sellers price their properties appropriately.

“This will rely on sellers pricing correctly and not seeing this as an opportunity to test aggressive pricing strategies,” Property Finder’s report stated. If sellers attempt to capitalize on the increased demand by inflating prices, they could risk deterring potential buyers. Therefore, it’s essential for sellers to strike a balance between maximizing their returns and maintaining realistic pricing expectations to sustain the momentum in the market.

Looking Ahead: What to Expect

The outlook for Dubai’s property market remains optimistic, particularly as analysts predict further interest rate cuts in the near future. Many experts expect the US Federal Reserve to continue easing monetary policy, with additional rate reductions likely in late 2024 and 2025. Should this happen, it would further reduce borrowing costs for UAE consumers, driving even more interest in mortgages and stimulating additional activity in the real estate sector.

In August, loans taken for new purchase mortgages accounted for 51.3 percent of total borrowing activity, with the average loan amount at Dh1.77 million. As mortgage rates continue to decline and more buyers enter the market, this percentage is expected to rise, further cementing Dubai’s position as a global hub for real estate investment.

In conclusion, Dubai’s real estate market is undergoing a significant transformation as more buyers opt for mortgages to finance their property purchases. With lower interest rates, increased mortgage education, and a strong desire for home ownership among tenants, the future of Dubai’s property market looks bright. As long as sellers price their properties correctly, the city is poised for sustained growth and continued prosperity in the years to come.