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How do mortgage interest rates work?

Interest rates are decided by a combination of factors, including economic factors, market conditions, and bank rates. A strong economy usually leads to higher interest rates...

Mortgage interest rates are one of the most important factors to consider when it comes to your mortgage. They will determine what your monthly mortgage payments will be and how much over the mortgage term you’ll have to pay back to the bank in interest. In this article, we’ll take a look at what your options are, how to get the lowest rates.

What is a mortgage interest rate?

Your mortgage interest rate is what it costs each month to finance your property. In addition to the capital, you’ll be paying for your home, you must also pay an additional fee every month in the form of an interest rate to your bank. This is what the bank charges you in exchange for letting you use its money to buy a home, and it is part of your monthly mortgage repayment.

Interest rates are calculated as a percentage of your mortgage’s balance.

How are mortgage interest rates set?

Interest rates are decided by a combination of factors, including economic factors, market conditions, and bank rates. A strong economy usually leads to higher interest rates; on the other hand, a weak or slow-growing economy leads to lower interest rates. Banks make their own decisions in terms of how much interest they want to charge for lending, but these decisions are always influenced by the state of the economy.

Banks will compete with each other by offering attractive rates to tempt buyers to choose them. There are also various types of interest payments, as we discuss in the section below.

What mortgage interest rate will I pay?

Mortgage interest rates are either fixed or variable.

Fixed-rate mortgages

A fixed-rate mortgage is where the interest rate you pay on the loan is “fixed” at a lower rate for a set period. In Dubai, this is usually between one and five years. Typically, the longer you fix for, the higher the interest rate will be.

Variable-rate mortgages

With a variable-rate mortgage, your interest rates can go up or down over time, meaning your monthly payments can vary.

Most variable mortgages have their interest rates linked to the Emirates Interbank Offered Rate (EIBOR), which is published by the UAE Central Bank.

How mortgage interest rates impact the market

While mortgage rates don’t directly impact home prices, they do influence housing supply - which does play a role in house prices. If mortgage rates go up, homeowners will be less likely to sell their property. This means fewer properties will be available on the market for sale, driving demand up, and prices with them.

When rates are low, homeowners have more of an incentive to sell their properties. This means more options will be available on the market, which swings the market in the favour of the buyer.

How to get the best mortgage interest rates

With so many mortgage options out there, and with each bank offering different rates, it’s always important to shop around to find the best mortgage terms that suit your circumstances. In most cases, you’ll need to meet the criteria to qualify for the best rates on offer:

Have a good credit score. Lenders will check your financial history when assessing your application to make sure you will be able to repay your mortgage loan, so make sure you have a good credit history.

Save for a bigger deposit. The bigger your deposit, the better your rates will be. That’s because if you have a bigger deposit, your loan-to-value ratio (LTV) will be smaller. In other words, you’ll be borrowing a smaller percentage of the property price, and will therefore be considered less of a risk than someone with a higher LTV.

Look around! There are hundreds of different mortgage options, so make sure to shop around. Need help with that? Try our mortgage calculator to find the best mortgage deals for you!

Want to compare the best mortgage deals?

At Huspy, we compare over 500 mortgage options in seconds to help you find the perfect mortgage match. All you need to do is answer a few simple questions first. Give our mortgage calculator a try now!

Written by Huspy Team

Published on 21 June 2022

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