Interest Only Mortgage Explained

When buying property in Dubai or across the UAE, choosing the right mortgage type is a major financial decision. While most homeowners opt for traditional repayment mortgages, some buyers consider an interest only mortgage as a way to reduce monthly costs in the short term. But is it the right option for you?

In this blog, we’ll explain what an interest only mortgage is, how it works in the UAE, the pros and cons, and why calculating interest only mortgage costs carefully is essential before committing.

What Is an Interest Only Mortgage?

An interest only mortgage is a type of home loan where, during an initial period (usually 5 to 10 years), you only pay the interest on the loan, not the principal. This means your monthly payments are much lower compared to a standard repayment mortgage.

However, at the end of the interest-only period, you still owe the full principal amount, and payments may increase significantly unless you refinance, sell, or switch to a repayment mortgage.

For example:

• •Loan amount: AED 2,000,000
  
  
• •Interest rate: 4%
  
  
• •Term: First 5 years interest only
  

Monthly payment = AED 6,667 (only interest).
But the principal (AED 2,000,000) remains unchanged after 5 years.

This is why calculating interest only mortgage figures upfront is critical.

How Do Interest Only Mortgages Work in the UAE?

In the UAE, interest only mortgage products are less common but are offered by certain banks, often with stricter eligibility requirements. They’re typically available to:

• •Investors looking to maximize rental yield.
  
  
• •High-income borrowers who want short-term flexibility.
  
  
• •Expats planning to sell before the repayment period starts.
  

Key Features in the UAE

• •Initial interest-only period: Usually 5–10 years.
  
  
• •Higher end-term repayments: After the interest-only phase, either a balloon payment is due, or you must switch to principal + interest repayments.
  
  
• •Stricter approval process: Lenders may require higher income levels or proof of investment strategy.
  
  
• •Loan-to-Value (LTV): Often capped lower than standard mortgages.
  
  

Advantages of an Interest Only Mortgage

Lower Monthly Payments

During the interest-only phase, your payments are significantly reduced, freeing up cash for other expenses or investments.

Flexible for Investors

Property investors may use the lower monthly payments to cover costs while maximizing rental income.

Short-Term Affordability

For expats who plan to resell within a few years, an interest only mortgage can make property ownership more accessible without committing to high monthly payments.

Drawbacks to Consider

Principal Doesn’t Decrease

Since you’re not repaying the actual loan, the principal balance remains the same.

Payment Shock Later

Once the interest-only period ends, repayments can rise sharply. Without proper planning, this can strain finances.

Higher Overall Cost

Over the long term, an interest only mortgage may cost more than a standard mortgage because the principal isn’t reduced early.

This is why calculating interest only mortgage affordability both during and after the interest-only phase is so important.

Calculating Interest Only Mortgage Costs

To decide whether this product suits you, you need to run the numbers carefully.

Formula for Interest-Only Payments

Monthly Payment = (Loan Amount × Interest Rate) ÷ 12

Example:

• •Loan: AED 1,500,000
  
  
• •Interest: 4.5%
  
  
• •Monthly interest-only payment = AED 5,625
  
  

But after the term ends, you’ll either:

• •Begin principal + interest payments (much higher).
  
• •Or repay the full AED 1,500,000 balance if refinancing or selling.

Tip: Always use a UAE-specific mortgage calculator for accuracy when calculating interest only mortgage options.

Who Should Consider an Interest Only Mortgage?

An interest only mortgage may suit you if:

• •You’re an investor relying on rental yields.
  
  
• •You expect property values to rise and plan to sell.
  
  
• •You have irregular income but expect future earnings to grow.
  
  
• •You want flexibility in the short term while using funds elsewhere.
  
  

However, it’s not ideal for buyers seeking long-term stability or those with limited financial flexibility.

Alternatives to Interest Only Mortgages

If the risks outweigh the benefits, you might consider:

• •Standard repayment mortgages – pay both principal and interest steadily.
  
  
• •Offset mortgages – link savings to reduce interest charges.
  
  
• •Fixed-rate mortgages – protect against rising rates.
  
  

Comparing these with interest only mortgage options is key to making an informed choice.

Frequently Asked Questions

Q: Can expats get an interest only mortgage in Dubai?
Yes, but availability is limited, and banks may impose stricter criteria compared to residents.

Q: What happens after the interest-only period ends?
You’ll need to start principal + interest payments, refinance, or sell the property.

Q: Is an interest only mortgage cheaper in the long run?
Not necessarily. While monthly payments are lower at first, total costs may be higher unless property values rise.

An interest only mortgage can be a helpful tool for certain buyers in the UAE, especially investors or short-term property owners. But because the principal doesn’t reduce, you must plan carefully for the future.

Always focus on calculating interest only mortgage repayments both during the interest-only period and beyond to avoid surprises.

For more information on interest-only mortgages or to discuss your options, get in touch with us today.