UAE loan costs to fall after Central Bank cuts interest rates

Government & Regulations

UAE loan costs to fall after Central Bank cuts interest rates

Borrowers in the UAE are set to benefit from lower loan costs following the UAE Central Bank’s latest interest rate cut. On Wednesday, the Central Bank announced a 25-basis-point reduction in the Base Rate for the Overnight Deposit Facility (ODF), bringing it down from 3.90% to 3.65%, effective Thursday.

The move comes after the US Federal Reserve reduced its Interest Rate on Reserve Balances (IORB) by 25 basis points, reflecting the UAE’s monetary policy alignment with the US due to the dirham-dollar peg. The Central Bank also maintained the rate for borrowing short-term liquidity at 50 basis points above the Base Rate for all standing credit facilities.

Mortgage rates in the UAE currently range between 3.49% and 4.75%, while personal loans average 3% to 9%, with premium profiles seeing offers as low as 2.59%. Analysts expect fixed mortgage rates to move closer to 3.75%–4.25%, while variable rates will adjust downward alongside EIBOR declines.

“Lower rates translate into meaningful savings for consumers,” said Hamza Dweik, Head of Trading (MENA), Saxo Bank. “A Dh2 million mortgage at 4% costs about Dh10,550 per month compared to Dh11,700 at 5%, saving Dh1,150 monthly. This also opens opportunities to refinance existing loans and enhances homeownership prospects as rents remain high in Dubai and Abu Dhabi.”

The Fed’s rate cut, reducing the target range to 3.50%–3.75%, reinforces a lower-rate environment for the UAE economy. Vijay Valecha, Chief Investment Officer at Century Financial, noted that this benefits households, businesses, and the non-oil sector, as the dirham-dollar peg remains secure.

This latest cut is the third in 2025, bringing cumulative borrowing reductions to 75 basis points. For the average variable-rate home loan of Dh1 million, annual savings could reach AED 2,500–3,600. Personal loans have already seen a 17.8% annual growth, with banks passing on lower costs for cars, education, and major purchases.

Reduced interest rates are also expected to boost domestic demand, increase disposable income, and support consumer spending growth of around 13% in 2025. The real estate sector may benefit from improved affordability, while cheaper financing for developers could sustain construction activity.

However, banking experts caution that lower rates do not automatically translate to cheaper loans for all. “Banks price credit based on liquidity, regulatory requirements, capital costs, competition, and demand. Borrowers with floating-rate loans benefit fastest, while fixed-rate borrowers mainly gain through refinancing,” said Aliasgar Tambawala, Co-CIO at Klay Group.

Overall, the UAE’s interest rate cuts are likely to provide meaningful relief for borrowers, stimulate domestic spending, and support ongoing economic growth across multiple sectors.