Which sort of interest is preferable—fixed rate or variable?—is a question we frequently receive here at Capital Zone. Depending on your unique situation, the answer to this question may vary, so it’s critical to first understand your preferences as well as the benefits and drawbacks of each rate type.
What is a fixed rate mortgage?
a mortgage where the interest rate you pay is fixed for a set amount of time. Fixed periods in the UAE typically last between one and five years, however they have been known to go up to ten years. Your mortgage will switch back to the variable rate that was previously agreed upon at the end of the fixed rate period.
Advantages:
- The interest rate is unchanging meaning your payments are ‘fixed’. This will allow you to budget more accurately and give you piece of mind.
- Protects you from rate fluctuations.
Disadvantages:
- Fixed rates are normally higher than variable rates.
- Your rate is only fixed for a set period meaning you will move onto a higher rate.
What is a variable rate mortgage?
A mortgage whose interest rate consists of EIBOR and a fixed component (bank margin) (see below for explanation of EIBOR). The rate you will pay will vary based on the EIBOR it is linked to because EIBOR fluctuates.
Advantages:
- A variable rate of interest will benefit from reductions in the EIBOR
- Often lower than fixed rates
Disadvantages:
- If the EIBOR rate rises, your interest rate will rise too.
- Limits your ability to budget long term as rate fluctuations will increase/decrease your mortgage repayments.
- Banks will often impose a ‘floor’ rate which is a minimum rate of interest which you will pay.
What is EIBOR?
The benchmark interest rate for lending between banks in the United Arab Emirates is the Emirates Inter-Bank Offered Rate (EIBOR). For financial transactions including mortgages, personal loans, and auto loans, borrowers and lenders both use the EIBOR as a benchmark rate.
Which mortgage type is right for you?
The answer to this question will depend on your specific situation because both rate kinds offer benefits and drawbacks. One of our fully licensed mortgage consultants at Capital Zone will be able to evaluate your needs and give you a recommendation based on your particular set of circumstances.
