Mortgage prepayment in the UAE
26 December 2022
What is mortgage prepayment?
There are a few different types of mortgage prepayment. You can either make a partial prepayment by paying off part of the outstanding amount or a full prepayment by completely paying off the outstanding amount.
Here are some ways to tackle mortgage prepayment:
- Make an extra mortgage payment each year (eg. an additional monthly payment)
- Consider biweekly payments. 26 biweekly payments = 13 payments per year
- Apply additional money to a single payment (a lump sum)
- Apply additional money to each recurring payment
- Recast your mortgage
- Refinance your mortgage
- A combination of the methods above
How does prepayment affect the principal and interest?
When you make a prepayment on a mortgage, the extra amount goes toward the principal. By decreasing the principal loan balance, you’ll also decrease the amount of interest you’ll have to pay on all of the following payments. This can save you a lot of money on interest in the long run.
When is it beneficial to prepay your mortgage loan?
First of all, you should consider how long you plan to own the property. If this is your dream home or long-term investment and you plan to pay off the mortgage fully, then it’s more beneficial to make a prepayment as you’ll save more money over time. If you were required to take out mortgage insurance, it will also help you eliminate these payments more quickly. Additionally, you’ll build equity on your property. Home equity is simply the value of the financial interest or stake that an owner has in their home, which increases as a mortgage loan is paid off. You can borrow against this equity to finance other purchases with lower interest rate loans or use it to refinance your mortgage.
Next, you’ll want to consider the interest rate on your mortgage loan. If market interest rates are low and expected to remain low, it may be more beneficial to invest extra money elsewhere rather than prepaying your mortgage. Likewise, it’s probably in your interest to prioritize high-interest debt on credit cards or other loans instead of mortgage prepayment. In any case, you should consider the benefits of contributing to your retirement savings and emergency savings or making another investment elsewhere.
Another factor is that most lenders charge a penalty for mortgage prepayment. Banks in the UAE can set their own prepayment conditions but must follow national laws regarding prepayment fees. You’ll want to understand your mortgage lender’s prepayment conditions and penalties to ensure that your prepayment savings surpass the associated fees.
Continue reading to learn about the regulations on mortgage prepayment in the UAE.
Prepayment fee example
Let’s look at one prepayment scenario and the associated costs. In this example, the purchase price is AED 3,500,000 and the borrower wants to pay off the loan fully in 5 years.
For the first 4 years, you can see that the prepayment fee reaches the AED 10,500 limit. However, in the final year, 1.05% of the outstanding loan amount (700,000) is lower than the limit so the corresponding amount is charged.
UAE banks and their prepayment fees
Here, we’ll look at the mortgage prepayment terms from the major banks in the UAE. Many banks have a partial settlement allowed per annum, which is the percentage of the outstanding loan amount that can be paid back free of charge each year. Any amount paid back in excess is still charged at 1% and capped at AED 10,000 (excluding VAT). A few banks also have exceptions when borrowers can prepay without any penalty.
Unless otherwise stated in the terms and conditions, you can anticipate a prepayment fee of 1% of the outstanding loan amount capped at AED 10,000 (excluding VAT). The current prepayment terms from these banks are listed above but could change in the future. Any additional terms must be specified in the loan offer you receive from a lender.
To sum up
Kredium specializes in international mortgages with options for UAE nationals, expats, and non-residents alike. We have experience working with all sorts of buyers and know what options are available given your personal and financial situation. Kredium can also help you find your dream home or investment property, with a portfolio of thousands of unique properties from all of the top developers in Dubai. Register on our website today to start getting help today!