Buying a home or a property in Dubai is of course a very exciting decision one can ever make in his life. When someone mortgages that property, one of the most important decisions he/she will make is to choose between the fixed-rate and variable-rate Mortgage. These mortgage rates decide your monthly repayment terms and financial stability.
In this blog, let's explore the differences, risks, advantages of fixed-rate and variable-rate. This complete analysis will help you make the right decision that will suit your financial goal.
Fixed Vs Variable Mortgage UAE: Explained
Under the guidance of UAE Central Bank, mortgage interest rates in Dubai are influenced by market benchmarks.
Emirates Interbank Offered Rate (EIBOR) reflects Interbank lending rates. It fluctuates based on economic conditions. Most of the variable-rates are linked to EIBOR.
What is a Fixed-rate Mortgage?
A fixed-rate mortgage is a mortgage in which your interest rate remains the same for a fixed period of time, irrespective of the changing market rates. In the UAE, you can continue with the fixed rate for 1 to 5 years. When the fixed-rate term ends, the borrowers continue with the variable-rate, unless refinanced.
For example, if your loan amount is AED 100,000 and the fixed interest rate is 5% for 4 years, while the total loan tenure is 25 years, your EMI will remain the same during the first 4 years. For the remaining 21 years, your interest rate may change according to market conditions. To better understand how this can affect your monthly repayments over time, you can use our mortgage calculator.
Advantages of Fixed-rate Mortgage
Fixed-rate Mortgage is considered to be the safest option for a borrower who is buying for the first time or the borrowers not comfortable with the market risks.
Advantages are;
Predictable monthly payments
Protection from rising interest rates
Easier budgeting for first-time buyers
Reduce financial stress
Disadvantages of Fixed-rate Mortgage
Fixed-rate mortgage does have some disadvantages. These are;
Starting rates are usually slightly higher
If market rates decrease, there will be no benefit to the borrower
Penalties may apply if the borrower considers early settlement.
What is Variable-rate Mortgage?
A variable-rate Mortgage is a rate typically linked to EIBOR. It fluctuates based on market conditions.
When benchmark rates decrease, your EMI also decreases and if the benchmark rates increase, there will be an increase in your EMI also.
This is best for the people who are comfortable with the market fluctuations and the risk involved in variable-rate.
Advantages of variable-rate Mortgage
It usually offers lower initial rates
With the fall in market rates, a borrower gets the benefit of potential savings.
It provides a greater flexibility
Disadvantages of Variable-rate Mortgage
There can be an unexpected increase of monthly payments
You cannot predict the monthly payments so the budgeting becomes harder.
During economic instability, financial risk increases.
Which one should a borrower choose?
Both the rates have advantages and disadvantages. Choosing between the two is not much confusing if the borrower understands his needs and requirements.
Choose fixed-rate if
You are buying for the first time
You prefer financial stability
You have no tolerance towards risks
You want your expenses to be predictable
Choose variable-rate if
You are aware of the market and can expect the interest rate fall
You have strong financial flexibility
You plan to refinance or sell the property within a short period of time.
Other options
In case of confusion between fixed and variable rates, you can also consider the hybrid options, that is a combination of both (i.e fixed-rate & variable-rate)
You can also choose the capped-rate mortgage. It is a variable mortgage with a maximum limit. Your interest rate cannot go beyond that limit even if the market rates increase.
Conclusion
There is no option that is recognised as best, the best is one that suits your situation. Before making a final decision, consider taking help of a mortgage expert. At Neon Mortgage, we provide end-to-end assistance such as comparing offers from multiple banks and securing the best terms. A well-informed choice today can save you significant money over the lifetime of your loan.
