Get ready for costlier bank loans this year

dubai - Higher cost of funding will lead to higher priced financing to consumers

The widely-anticipated US Fed Rate hike was announced on December 14 last year. This quarter point (0.25 per cent) increase swiftly found its way into the GCC through matched increases in benchmark rates across several economies. The Central Bank of the UAE raised its key (certificate of deposit) rate by 25 basis points.

We are headed towards a gradual rise in profit/interest rates through the year. From a local banking perspective, it implies a rise in the cost of funds borne by banks. History tells us that the higher cost of funding will lead to higher priced financing to consumers in 2017. The extent of the rise will vary across retail products:

Mortgages/home finance
It is likely the Fed rate hike will have an immediate and direct impact on home finance rates paid by customers. Home finance options in the UAE are typically variable rate products pegged to some measure of local profit rate/interest rate benchmarks (such as Eibor - Emirates interbank offered rate). As Eibor rises, so will the effective rates paid by customers on home finance.

Personal loans
In most cases, this will not affect existing customers who have availed of rates that are fixed for the entire duration of their personal finance. However, there are some variable rate personal finances in the UAE market and these are likely to be re-priced upwards, resulting in additional profit rate/interest payments and/or higher monthly installments. While existing customers with fixed rate finances are not impacted, new personal finances are likely to be priced higher now as banks will look to pass on rising costs of funding to customers. So, whether you are looking to top up an existing finance or avail a new one, you are likely to pay a higher rate in 2017.

Auto loan
Similar to personal finance, we can expect to see a gradual rise in rates charged on new auto loans.

Credit cards
These are least likely to see any rate increase since cards are already priced much higher than other consumer credit products. A 25/50 basis points increase in cost of funding is immaterial. However, we can expect deals such as zero rate balance transfer offers or low-priced 'cash against card limits' to tighten.

As a consumer, you can effectively manage the anticipated rise in the cost of financing:

Home loan
a) Most banks have attractive headline rates that usually apply for the first year before the contract moves into an Eibor-linked variable rate. Banks also offer home finance where the rate can be fixed for two or even three years. Although these rates will be higher, it may well be worth locking in your home finance rate for longer to eliminate the uncertainty around rising variable rates.

b) Run down your existing balances if you can. The 're-pricing' or higher variable rate applies to your outstanding balance. If you can chip away at your outstanding amount, you will be able to offset some of the rate increase by paying on a lower amount (and hence achieving a lower absolute or dirham cost on your home finance).

Personal loan
a) Some banks offer variable pricing on personal finances. This may be an opportune time to switch to a fixed rate personal finance product. You are better off locking in your personal finance for the entire duration (maximum of four years) in a rising rate environment.

b) If you anticipate the need for personal finance over the next year, you may want to apply earlier, rather than later. You are likely to face higher financing costs for the same facility/amount in the near future.

2. Build and maintain a clean credit history. While we are looking at a rising rate environment, there will always be some form of price differentiation. Practically all banks in the UAE refer to the Etihad Credit Bureau report; a good credit history will probably mean better pricing for new credit to individuals. Avoid over-leveraging, ensure prompt payments on all your credit facilities and utility bill payments. Chances are that banks will reward you for a good track record through preferential pricing.

3. Snap up low-cost deals. You can lower the cost of finance by availing of zero per cent balance transfer deals on your credit card. These time-bound offers might be a good source of short-term funding and will provide low-cost cash.

4. Start saving. While customers will pay higher costs, savers are likely to gain from rising profit/interest rates. The rates paid by banks on savings account and term deposits have remained relatively low in the recent past. However, as market rates pick up, savers will start to see improved returns, although the benefit is still likely to be lagged and less pronounced than the rise in the cost of financing.

The writer is the head of consumer finance, Noor Bank. Views expressed are his own and do not necessarily reflect that of Noor Bank or the newspaper.