The role that banks play in providing loans to people when they need financial support is well known to everyone, but have you ever thought of what would banks do in situations when they themselves face a shortage of funds? Sometimes this happens, which makes a bank choose to borrow from another bank that is in a better financial position at the time.
And as is the case with loans provided to people, the lending bank charges the borrower bank an interest rate on the borrowed amount of money, a percentage that varies from one bank to another. These interbank transactions are regulated by the Central Bank in the United Arab Emirates through the “EIBOR” system, which stands for Emirates Interbank Offered Rate.
What are the Emirates Interbank Offered Rate?
It is a rate announced on a daily basis by the Central Bank in UAE, calculated based on the interest rates applied to interbank loans in the country. The largest banks in the United Arab Emirates, a group consisting of about ten to twelve banks, and not less than eight banks, send the interest rates that they apply between each other or the rate that a bank applies when providing a loan to another bank to the central bank. The central bank calculates the average rate of interest rates sent to it by all these banks, excluding the two highest and lower values, and then publishes this percentage on its website every morning.
The EIBOR rate is closely related to the interest rates applied to loans provided by banks to individuals applying for a mortgage in the United Arab Emirates when they want to buy property in Dubai, as banks take EIBOR value as the base they calculate the variable interest rate upon, adding to it a percentage that is decided by each bank differently to decide the loan interest.
What are variable interest loans?
When you decide to buy property in Dubai by applying for a mortgage you will notice there are several loan types according to the type of interest applied to each of them:
Fixed interest mortgage:
When you choose to go with a fixed-interest mortgage, the bank sets a certain percentage for an agreed-upon period of time that may range between one and five years during which you pay a fixed value that does not change from one month to another until the end of this period, after that the fixed interest rate is converted to the variable interest rate.
Variable Interest Mortgage:
A variable interest loan is a loan in which the interest due on the borrowed amount is determined each month according to another value, which is here “EIBOR” or the interest rate applied between UAE banks. When you apply for a mortgage to buy property in Dubai with a variable interest loan from a United Arab Emirates bank, the bank adds a certain value to the EIBOR rate specified by the Central Bank to calculate your loan interest rate every time your loan installment is due.
In other words, the amount you have to pay as a monthly installment cannot be accurately known beforehand, rather it is variable according to the change in the EIBOR rate, which may increase or decrease and thus increase or decrease your mortgage installment.
Although this type of interest carries a kind of instability as it is not possible to know specifically the exact amount you pay monthly or the total amount paid at the end of the tenor, besides the risk involved in case an increase in the EIBOR rate happened, it also holds the possibility of decrease in the monthly mortgage payment you owe in the event that the EIBOR rate falls.
According to this, you notice that the EIBOR rate is not only related to interbank lending, but that it directly affects personal loans and mortgages, and it is one of the important things that you should be aware of before applying for a mortgage in Dubai.
