Get ready for costlier bank loans this year

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By Mohsin Aikal

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.

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