Interest-only mortgages explained

Interest-only mortgages provide various benefits to borrowers and can be a good option if you need to reduce your monthly outgoings. The concept of interest-only mortgages is still a relatively new one in the UAE, so options are quite limited. However, with UAE lenders becoming more competitive we see this as a potential growth area. Below we explain what an interest-only mortgage is and why you might consider one.

What is an interest-only mortgage?

An interest-only mortgage is a home loan where you are required to pay just the interest owed on the loan for an agreed time period. This means that when you make your monthly mortgage payments to the lender, you are only paying towards the interest owed on the loan, rather than the principal (original amount borrowed).

Difference between interest only and repayment mortgage

A typical repayment mortgage works differently to an interest-only mortgage. With a typical repayment mortgage your monthly payments go towards covering both the interest owed on the loan and paying down the principal amount. The monthly payments on a typical repayment mortgage are generally higher than an interest-only mortgage since you will be paying down both the principal and the interest owed.

How does an interest only mortgage work in the UAE?

Currently, there is a limited number of options when it comes to interest-only mortgages in Dubai and the UAE and these are only granted by the lender for a set period of time, typically no longer than one year. At the end of this period the mortgage reverts to a normal repayment mortgage and your monthly repayments will be adjusted to take into account the principal still owed. This means that they generally increase following the interest-only period.

Reasons to choose an interest-only mortgage

Given that interest-only mortgages tend to be allowed for just a short-term period in the UAE, the main reason to consider one is to reduce your monthly mortgage payments for a set time frame.

An interest-only mortgage is a good option when you require some flexibility or experience issues with cash flow.

For example, if you have just purchased a new property and need to buy furniture or carry out renovations, then you might consider an interest-only mortgage for a period of time. The lower monthly repayments will allow you to be more flexible with your spending, whilst still meeting the commitments of your mortgage.

As mortgage advisors, we often suggest an interest-only mortgage option to landlords who have recently purchased a property and are looking for new tenants to rent the property. In the time between completing on the mortgage and finding the right tenants for your property, an interest-only mortgage can help keep the outgoings on your investment to a minimum.

An illustration of the potential savings

To provide some context, let us consider an example of the savings that could be seen with an interest-only mortgage lasting for just one year.

If you took a typical repayment mortgage of AED 1.5M with an interest rate of 2.39%, the monthly repayments would be AED 6,646. This amounts to AED 79,752 annually. If you took the same mortgage amount and interest rate, but on an interest-only repayment basis for the first year, then the monthly repayments would be AED 2,987.50. Over the course of a year this would amount to AED 35,850. In this case, opting for the interest-only mortgage for just one year would amount to a massive saving of AED 43,875 – which could be used towards renovating your new property!

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

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