A guide for borrowers in the UAE considering mortgage prepayment. Discover how and when prepayment can be financially worthwhile.
What is mortgage prepayment?
When you take out any sort of loan, you’ll sign an agreement with the lender that specifies the terms and conditions. By signing this contract, you as the borrower are responsible for paying the lender back for the principal (the total loan amount) plus interest within a specified time frame known as the loan term. To repay the loan you’ll typically be required to make monthly payments towards the principal and accrued interest. However, if you decide to pay the loan back sooner and you pay back larger portions of the loan than the monthly requirement, this is called loan prepayment. Mortgage prepayment is when a borrower pays back their mortgage in advance before the loan term expires. It’s also referred to as home loan pre-closure, early repayment, or loan settlement.
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 first start paying back a mortgage, most of your monthly payment goes toward the accrued interest instead of the principal amount. You can use a mortgage calculator and input basic property and financing conditions (eg. down payment, interest rate, loan term) to get a standard overview of the payment plan, known as the amortization plan. This plan shows you how much of your payment (either monthly or annually) goes towards the principal, interest, and taxes/fees, and also the remaining loan balance.
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?
Prepaying a mortgage sounds like a good idea, but you’ll want to consider your personal and financial situation first. While making mortgage prepayments can save you money over time, it may not give you as high of a return as that money could elsewhere.
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
The Central Bank of the UAE regulates and supervises all licensed financial institutions in the UAE. In 2019, the Central Bank issued a new decree that reduced early settlement fees or the penalties that lenders are allowed to charge for mortgage prepayment. Prepayment fees in the UAE are restricted to 1% of the outstanding loan amount with a maximum fee of AED 10,000. This is much lower than the previous 3% restriction, allowing more borrowers to prepay and refinance their mortgage. The UAE also has a Value Added Tax (VAT) which means that, in practice, the prepayment fee is actually capped at 1.05% or AED 10,500, whichever is lower.
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.
Imagine you want to prepay your loan and fully close it 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
As mentioned above, banks can set their own conditions regarding mortgage prepayment as long as they don’t exceed the restrictions set by the Central Bank.
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.
UAE Bank Mortgage Prepayment Terms
Partial settlement allowed per annum
Fee-free settlement exceptions
Abu Dhabi Commercial Bank (ADCB)
Abu Dhabi Islamic Bank (ADIB)
Standard Chartered Bank (SCB)*
Arab Bank (AB)
United Arab Bank (UAB)
After the fixed period (if applicable):
Commercial Bank of Dubai (CBD)
Dubai Islamic Bank (DIB)
Emirates Islamic Bank (EIB)
First Abu Dhabi Bank (FAB)
First Abu Dhabi Bank Islamic
National Bank of Fujairah (NBF)
*In case of early settlement through personal funds, a 0.525% penalty of the outstanding amount (capped at AED 10,500) for the first 5 years of the mortgage.
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
You now know more about mortgage prepayment, including when to consider prepaying, and you’ve seen an example of a prepayment scenario, and the current prepayment terms from the largest banks in the UAE. It’s definitely worth considering each bank’s prepayment terms during the process of choosing a lender. Here at Kredium, our experienced mortgage brokers can present you with personalized loan offers from various lenders so you can easily compare the terms and conditions side by side. We save you the time and hassle of visiting each bank individually – all you have to do is contact us and we’ll help you with the rest. We also have plenty of UAE-specific blogs to help you learn about rental properties, mortgage pre-approval, title deeds, property valuation, and much more.
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!