A guide to mortgage refinancing in the UAE and when you should consider it as a mortgage owner. 

What is mortgage refinancing?

Mortgage refinancing is when you replace your current mortgage loan with a new mortgage loan. This is also commonly referred to as remortgaging or a buy-out mortgage. 

During refinancing, a borrower will often switch to a different lender that will buy them out of the loan from the previous lender. The borrower then makes monthly payments to the new lender given the specified interest rate, terms, and conditions. It’s also possible to refinance a mortgage with your current lender if you want to take advantage of improved market conditions or change the terms and conditions of your loan. In both cases, instead of using the loan to purchase a property, the new mortgage loan is used to pay off your previous loan. The borrower then simply continues to make monthly payments on the new loan. 

What’s even the point if you’re just replacing one mortgage with another? Refinancing can save you a lot of money and allow for flexibility in your loan terms and conditions. Since loan terms can be up to 25 years in the UAE, it’s very possible that your financial situation will change during that time. You may seek to refinance your mortgage in order to change the required monthly payment or loan term. 

A mortgage calculator can be helpful to estimate how much you could save with lower interest rates or a shorter loan term. As an example, let’s look at just how much different interest rates and loan terms can affect your monthly mortgage payments. The payments below are for a mortgage loan of AED 2,500,000 looking at rates from 1.90%-3.60% and terms from 10-25 years.
Monthly mortgage payments for a loan of AED 2,500,000
Interest rate 10 years 15 years 20 years 25 years
1.90% 22,892 15,973 12,529 10,475
2.20% 23,228 16,319 12,885 10,841
2.40% 23,454 16,552 13,126 11,090
2.60% 23,681 16,788 13,370 11,342
2.80% 23,910 17,025 13,616 11,597
3.00% 24,140 17,265 13,865 11,855
3.20% 24,372 17,506 14,117 12,117
3.40% 24,605 17,750 14,371 12,382
3.60% 24,839 17,955 14,628 12,650

As you can see, the monthly payment is lower as the interest rate decreases and the loan term increases. However, the total interest you’ll have to pay back will be significantly higher for loans with a longer term.

When to consider refinancing your mortgage

There are many different scenarios when you might want to think about refinancing your mortgage loan, either because it will save you money or is a better fit given your current financial situation. 

It's considered best practice to review your mortgage loan once a year to ensure that your rate is competitive and there aren’t significantly better options from other lenders. Let’s consider under what circumstances refinancing can be the most beneficial.

To take advantage of lower interest rates 

Borrowers with fixed-rate mortgages often refinance to take advantage of lower interest rates. During the fixed-rate period, which can be up to 5 years in the UAE, you could save money by refinancing if the market interest rate (determined by EIBOR) is around 1-1.5% lower than your existing rate. Even if the market interest rate hasn’t changed much, other lenders may still be able to offer you lower interest rates. Thus, it’s worth looking into refinancing offers from various lenders from time to time. 

There are two factors to also consider here: the outstanding loan amount and how long you plan to stay in (or own) the property. The outstanding loan amount will determine how much you’re able to save on interest over time. If your outstanding loan value is fairly low, it probably won’t be worth it to refinance. Similarly, if you don’t plan to own the property for much longer, you probably won’t reap the benefits of a lower interest rate. Since there are costs associated with refinancing (more on this below), the savings might not outweigh the total costs.

To keep a fixed-rate mortgage

It’s especially important to review your mortgage if you have a fixed-rate mortgage that’s nearing the end of its fixed period. With the latest EIBOR trends significantly increasing variable-interest rates, borrowers are refinancing to keep a fixed rate. Having a fixed-rate mortgage allows borrowers to budget for steady monthly payments that won’t be affected by EIBOR changes. You should look into refinancing anywhere from 3 to 6 months before your fixed-rate period expires so you have time to compare offers.

To change the mortgage term

Other than prepaying your mortgage early, refinancing is the only way to change the loan term. You can choose to refinance with a shorter mortgage term to pay off the loan and build equity more quickly, or with a longer mortgage term to decrease your monthly payments.

To get ready cash to cover other expenses

You may want to tap into your home’s equity or the value of the property that you’ve paid off. Through cash-out refinancing or home equity loans, you can get ready cash to invest elsewhere, buy another property, upgrade your current property, or use for emergency purchases. You’re essentially releasing the money that you’ve already invested into the property. While this can be helpful in a pinch, this kind of refinancing will have higher closing costs and you’ll have to pay back more money in the long run.
A paper and notebook used for calculating a monthly budget, like monthly mortgage payments.

Before making the final decision to refinance, it can be beneficial to approach your current lender to see if they will offer you more favorable terms to keep you as a customer. This could save you the time and hassle of refinancing through a different lender. 

There are a few fees associated with refinancing that should be on your mind when determining if it’s financially beneficial to refinance your mortgage or not. Let’s look at what fees you should expect.

What fees can I expect when refinancing?

The two main costs you’ll want to consider are the closing costs associated with taking out a new loan and the prepayment fees (or settlement fees) your old lender will charge. 

Each bank has its own closing costs when it comes to refinancing. Some will be fixed fees while others vary based on the outstanding loan amount. 

The closing costs will include:
  • Property valuation fee
  • Mortgage de-registration fee*
  • Mortgage registration fee*
  • Mortgage registration Trustee fee
  • Title fee*
*If the property is in Dubai, these fees will be paid to the Dubai Land Department (DLD).

Here’s an estimation of some of the closing costs:
Mortgage de-registration fee AED 1,590
Property valuation fee AED 2,500 - 3,000 + VAT
Mortgage re-registration 0.25% of the mortgage amount, plus AED 290
Mortgage registration trustee fee
  • For properties less than AED 500,000: AED 2,000 + AED 100 (5% VAT)
  • For properties more than AED 500,000: AED 4,000 + AED 200 (5% VAT)

Just like your initial mortgage loan, there will be recurring costs such as homeowners insurance and property taxes. If you refinance with a different lender, they may have different requirements when it comes to homeowners insurance.

You’ll also have to make a prepayment fee to the old lender from which you took out the initial loan. The Central Bank of the UAE regulates the early settlement fees that banks can charge. As of 2019, prepayment fees in the UAE are restricted to 1% of the outstanding loan amount with a maximum fee of AED 10,000 (or 1.05% and AED 10,500 including VAT). Thanks to this regulation, you’re sure to be covered in terms of prepayment penalties if you budget AED 10,500. However, some banks have exceptions to this rule so be sure to review the
prepayment terms of the largest banks in the UAE.

To sum up

Many borrowers take out a mortgage loan and then think that’s it, all they need to do is see out the loan term to pay back their loan. But now, you know about mortgage refinancing and the benefits it can provide. While it’s not always a good decision for every buyer, if you regularly review your options and wait until the conditions are right, it can help you save big! 

Our mortgage experts at Kredium can help you refinance your mortgage. We do the heavy lifting for you, searching for offers from all of the largest banks in the UAE to find you a personalized loan offer. Kredium helps UAE nationals, expats, and non-residents with all of their mortgage needs. Contact us to get mortgage guidance today. 

Or, if you’re still searching for a property, we have over 5,000 properties from the top developers in the UAE to choose from. There’s a dream property out there for buyers looking for their first home, second home, or investment property. Register on our website to see all the ways we can assist you.
Photo credits:
  • Mina Živić | Kredium
  • Photo by NORTHFOLK | Unsplash

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