The interest rate is the expense of borrowing money, and APR (annual percentage rate) is the interest rate plus all required fees the lender imposes to set up the loan. That's why, when you look at a UAE bank's mortgage rates, you see a low (advertised) interest rate, but the APR for the same rate is significantly higher. A lot of buyers sign a loan without realizing the figures are only the minimum and the other fees, such as processing fees, arrangement fees, and life insurance premiums, are tacked on later, fooling them into thinking they are only paying the minimum. This guide explains what each rate represents, why UAE banks must provide both rates, and how to read the numbers on your own Key Fact Statement before committing to a lender.
What Is an Interest Rate?
The interest rate is the percentage that you pay on the amount of money that you borrow, and not anything else, each year.
This rate is used by banks to determine the monthly installment on the outstanding balance of the loan. This can be fixed for an initial period (usually 1 to 5 years) and/or variable, which is when it will fluctuate in line with a reference rate, such as EIBOR (Emirates Interbank Offered Rate) plus a bank margin. The advantage of a fixed-rate mortgage is that the principal and interest payment is fixed for that period, no matter what happens in the market.
The interest rate a bank in the UAE can offer you depends on your credit history, stability in your income, and the loan-to-value ratio of the property. The better the application, the lower the LTV or the larger the down payment, the lower the quoted rate. However, the interest rate does not necessarily give you any information about the arrangement fees, valuation costs, or insurance premiums that are included in the loan.
Tip: When shopping around for an interest rate comparison, find out if the interest rate is fixed or variable , a fixed-rate quote now won't be a good comparison if it's a variable rate that could increase in the future.
What Is APR and What Does It Include?
APR (Annual Percentage Rate) is the percentage of interest and all required fees and charges to obtain the loan, combined into one annualized rate.
The UAE Central Bank's Consumer Protection Standards stipulate that licensed banks and finance companies must specify the APR, in addition to the base interest rate, for personal loans, auto loans, and mortgages. Typically, APR will include the bank's processing or arrangement fee, any required appraisal charges, life insurance or mortgage insurance premiums (if required), and any other costs you are required to pay in order to receive the loan proceeds. Discretionary costs do not typically form part of APR, since they are not certain costs that you have to pay if you take the loan.
The reason is that two UAE banks may offer the same interest rate on a mortgage, but they may have different APRs due to the processing charge fee based on a percentage charged by one, as opposed to a flat arrangement fee charged by the other, plus a mandatory valuation fee. When comparing banks that have the same headline rate, the one with the lower up-front charges will generally offer a lower APR. That's why the Mortgage Calculator offered on our website prompts you to enter fees in addition to the rate , it's asking different questions.
Tip: Do not try to do your own calculations for the APR figure: UAE banks must give you this on your Key Fact Statement.
Why Is APR Higher Than the Interest Rate?
APR is typically higher than the interest rate as it will account for any mandatory upfront fees you have to pay over the life of the loan.
Let's take a simplified example: A lender is providing a personal loan with a fixed interest rate, and a processing fee is taken in advance. That rate will mean that the actual amount you are receiving will be lower, but you will still pay interest on the full principal, which will increase the effective annual cost. This increases the APR quite a bit. The shorter the time frame, the greater the hike in APR, since the fixed fee is spread over fewer years. A fixed origination fee is typically going to have a higher APR if it's a short-term loan, as the fee, when applied over one year, is a larger portion of the loan.
The exception to this is UAE credit cards, where the interest rate and APR are often the same. Card issuers don't usually add a separate mandatory fee to the calculation of the interest rate, as is done in the case of mortgage and personal loans. Personal loans and mortgage loans, however, will have a higher APR than the quoted rate when you include the cost of items such as valuation, processing, and insurance, which will depend on the lender's fee structure.
Always, when a lender gives you the interest rate for a mortgage or personal loan with an APR that is equal to the mortgage or loan interest rate, ask them if the fees being charged are really being waived or merely paid at the time of closing.
How UAE Banks Calculate and Disclose APR
The APR, the interest rate, and the fees must be clearly stated in a standardized Key Fact Statement (KFS) before you sign, according to UAE Central Bank regulations.
According to the Central Bank's Consumer Protection Standards, licensed financial institutions are required to provide the annual percentage rate that includes the interest or profit paid or to be paid and the cost of any additional fees, compounded on an annual basis. It is applicable to all bank- and finance-company-issued mortgages, personal loans, car loans, and credit cards in the UAE. The Central Bank also prohibits paying interest on top of interest collected and charging unearned interest if you pay off your loan early (details of this can differ depending on the loan product and lender, so check with your bank).
In reality, this should be on a UAE bank quote, where the interest rate is stated on one line and the APR on the other, with a breakdown of the processing fee, insurance fee, and any other mandatory fees. As it is a standard disclosure, if a lender cannot provide this document or the two numbers on this document, this should be raised directly with the lender before proceeding. If you're a new home buyer, our First-Time Home Buyer can assist you with this document, one line at a time.
Tip: Keep a copy of every Key Fact Statement you receive , it's your reference point if a bank's actual charges later differ from what was quoted.
Flat Rate vs. Reducing Balance: Why It Changes Your APR
A flat-rate interest is applied to the total amount of the loan, regardless of the number of years remaining on the loan, during the life of the loan. A reducing-balance rate, on the other hand, deducts interest from the remaining balance, which will decrease each year as the balance decreases. While it may seem on paper to be a flat rate, it could actually have a significantly higher effective cost, which is another way of saying a higher APR, since you will still be paying interest on money you've already paid back.
This distinction is more significant in UAE personal and auto loan markets as opposed to those in which reducing-balance calculations are more prevalent. Before comparing two quoted interest rates directly, always ask any UAE lender which type they are using, as a flat-rate loan at a slightly higher interest rate can have a comparable true rate of interest to a reducing-balance loan at a much lower interest rate.
Before comparing a flat-rate offer with a reducing-balance repayment, use our Affordability Calculator to model the reducing-balance repayments.
A Worked Example in AED
This is an example of a fee that could make the APR higher than the interest rate (this is not an actual loan quote).
If a lender is providing a loan of AED 100,000 with a flat interest rate of 6% for 5 years and a processing fee of 2% is taken upfront, what is the total cost of the loan? That fee eats away at the amount you get, reducing it to AED 98,000, but you keep paying interest and principal on a total AED 100,000 balance. If the fee is divided between the duration of the loan and added to the interest cost, the annualized true cost, also known as the APR, comes out higher than the 6% headline rate. This is dependent on what your lender requires and how he or she calculates the fee.
The gap may be exacerbated by a combination of mandatory life insurance or an arrangement fee for a loan, in addition to the processing fee, as is often the case for UAE homes with loans over a set LTV ratio. The interest rates on two loans may seem the same, but once added up with the particular charges each bank imposes, they can have very different APRs.
Tip: Use a loan calculator to get a real quote, or directly ask your lender for the APR instead of doing these calculations by hand.
Which Number Should You Compare When Choosing a UAE Home Loan?
Shop around for the APR and use the APR primarily to help estimate your monthly payment.
If you're more interested in whether or not you can afford that monthly payment, you should pay attention to the interest rate. When considering which bank's offer is really cheaper in total, APR is the figure that you want to look at because it tells you the mandatory fees that you pay (and the whole annualized amount of the loan). That's because APR will be the figure that reveals the difference between a mortgage loan with a higher interest rate and lower processing fees vs. a mortgage loan with a lower interest rate and higher processing fees.
Note: APY comparisons can only be made approximately between loans with similar terms. If you're considering the difference in APR between a short fixed-rate loan and a long variable-rate mortgage, you will not get an apples-to-apples answer since the fees and assumptions of this comparison are different across time horizons. Need to consider rent vs. buy? Our Rent vs. Buy Calculator compares both.
Tip: Get the quotes of the APR from a couple of UAE banks for the identical loan, duration, and type of property, and compare the offers directly , our Mortgage Services crew can help you compare quotes directly.
Conclusion
The difference between your interest rate and your APR is not a trick , it's a way to make you feel as if you're getting a better deal on a loan, but really, you're not. APR provides a much better indication of a loan's true cost, since it takes the fee structure that UAE Central Bank regulations require lenders to disclose in advance. Note that the interest rate is the one that will affect your monthly payment, whereas the APR will show you the actual annual cost of the loan, along with the mandatory fees, and that flat-rate loans may cost more than they appear at the initial interest rates. Always ask for the Key Fact Statement and feel free to seek an independent comparison between APRs with our team. Before signing any offer, compare APRs side by side across UAE banks.
