The EIBOR serves as the basis for determining interest rates on loans and deposits and is a key indicator of the cost of borrowing in the local market. When EIBOR rises, financing costs increase; when it falls, financing costs are also expected to decrease. With the base interest rate held steady, the mortgage finance market is expected to see stability in loan installments, which positively impacts housing demand and investment growth. However, contracts that include a 'minimum profit' (Floor) clause may slow down some borrowers' ability to benefit from this decline. Recommendations before signing a mortgage finance contract: If a party wishes to obtain bank financing to purchase property, they should verify the type of interest rate—whether it is 'fixed' or not. Then, inquire about the 'EIBOR + bank margin' to calculate the total interest. This linkage places borrowers in a sphere influenced not only by local banking policies but also by external factors, such as the policies of the US Federal Reserve, due to the dirham's peg to the dollar. Most banks in the UAE provide mortgage financing based on the EIBOR rate plus a fixed margin agreed upon in the contract. If the rate is 'variable,' it is permanently linked to the EIBOR rate. Inquire about the annual or quarterly interest rate review period. Inquire about the existence of a 'minimum profit' (Floor) clause and whether it will affect the reduction in installments after an EIBOR cut. Use a mortgage calculator to compare scenarios before committing to the contract. The 'minimum profit' (Floor) clause may prevent installments from decreasing by the same amount that the EIBOR falls. For example, if the EIBOR is 3.5% and the bank's margin is 1.75%, the total interest rate on the financing is around 5.25%. This linkage means that a borrower's installments automatically change with the EIBOR rate during the financing period if the contract is flexible (Variable Rate). The EIBOR (Emirates Interbank Offered Rate) is a daily interest rate indicator announced by the Central Bank of the UAE, reflecting the average interest rates at which banks lend to each other in dirhams. Installments rose significantly when the EIBOR increased during the 2022-2023 period, adding pressure to the budgets of families and real estate investors. 'Minimum Profit' Holding the base interest rate steady is expected to limit the rise of the EIBOR, leading to stability or a gradual decrease in mortgage installments linked to it. However, there is an important point: some financing contracts include a 'minimum profit' (Floor) clause, which can prevent installments from falling by the same amount as the EIBOR, as it does not allow the bank's margin to decline below a certain level even if the EIBOR drops. This means that for borrowers with flexible contracts (in case of a stable or falling EIBOR due to the base rate being held steady), installments may decrease or remain stable, which eases the financial burden on households. However, holders of contracts with a 'minimum profit' clause may not fully benefit from an EIBOR decrease, and their installments may remain at higher levels compared to actual interest rates. From the perspective of real estate investors, holding the base interest rate steady enhances the ability for long-term financial planning and investment and limits significant fluctuations in the cost of borrowing. Installment Stability The EIBOR rate remains the primary indicator for the cost of mortgage financing in the UAE, and its impact on installments is determined by the extent of the contract's linkage to this rate and the banking policies for its update.
