There are many reasons why you might want to clear your mortgage in the UAE early, from refinancing through to you leaving the country and selling up rather than opting to rent out your property. But does it make financial sense and what do the banks charge for you to do so?
What happens if I want to settle my mortgage early?
When a lender agrees to your mortgage, they do so having calculated the profit for them. Banks and other lending institutions are patient, and consider a greater sum made over a longer time far more worthwhile than smaller, quicker profits. To them, a mortgage is a fine prospect, as they are typically high priority considerations for their customers that are paid in full each month with a comfortable amount of profit or margin made in interest.
By choosing to settle your mortgage early, you cut the bank off from all those future interest payments. They potentially lose you as a customer and get very little out of it – after all, they weren’t in any rush for their loan back. To mitigate this, lenders throughout the UAE tend to charge a settlement fee to offset their losses.
The benefits of settling early
Putting the upset of the bank aside, what’s in it for you?
Settling early saves you a lot in interest payments over the years. If your terms aren’t fixed because you are on a variable rate, for example, then it’s a little more difficult to calculate just how much you save. If you are on a fixed rate mortgage where repayments can be calculated more precisely – then the savings are clearer.
If you have the money available to take yourself out of debt, why wouldn’t you?
There’s also the emotional and mental aspects of loans. Though the monthly repayments are relatively easy for you to make (after all, no respectable lender would have cleared you for the mortgage if repaying it was too much of a struggle), being without them frees up a huge chunk of your salary and that consideration of a monthly outgoing.
In fact, the improvement in quality of life for people without debt is well known. Choosing to have a mortgage is a perfectly reasonable undertaking, but that doesn’t mean being without one isn’t without its upsides!
It could also be that you’ve simply found a mortgage with a far superior rate and want to switch over. It doesn’t free you of debt, but it could save you thousands.
The early repayment fees
Let us not forget the lender’s settlement fee, however. When making any financial decision, it is important to consider the numbers properly and see whether it’s truly in your best interest to do so.
How your mortgage may differ
Not all mortgages work the same way. Different lenders have different terms, and even within the same institution, different offers will mean that mortgage rules are not the same for everyone.
It’s important to know how your mortgage is set up to know whether the settlement fees are on the high side or perfectly reasonable. Here are a few things to look out for:
The early redemption fee rate
What is the rate for early settlement? Some lenders keep this low at 1% of the total remaining balance, others push as high as 3%. If the early repayment fee is low, then this makes the penalty for doing so much less of a headache.
How you intend to repay the loan
This interesting clause can make a huge impact on the worthiness of an early repayment. Often the lender will have different fees depending on where the money is coming from to clear the mortgage.
If the money is coming from your personal funds, the settlement fee is likely lower than if it is being paid off via a buyout or business finance. In fact, some banks are incredibly kind with this factor, offering a minor flat fee only if the money comes from personal savings rather than any type of refinance.
In short, where the money comes from can have a huge impact on the overall cost of settlement.
When you settle
Often, the rate of the fee will change the further down the line you are with your repayments. Pay off very early and you could be slapped with a painful level of early redemption fee – generally settling early within a fixed rate period incurs the highest penalty. If you wait a few years then the penalty fee can drop to a more reasonable level, with some banks even offering no penalties to settle early after a certain number of years.
Paying off faster – what about overpayments?
Paying off your mortgage at speed, rather than attempting a single settlement, can also be to your advantage. Many UAE banks offer over-payments with no fee whatsoever, letting your speed up your mortgage and lower the interest as you go. With the salaries available in the region, this can be a more realistic option than it is in Europe where the percentage impact of your mortgage on your outgoings is often more significant.
Regularly paying more than your required monthly mortgage payment could cut years off the final settlement, and if you do want to pay off your entire mortgage early, you’ll have lowered the end fees too.
Planning in advance – why you should advise your advisor!
If you believe you may want to settle your mortgage before the term is complete, it’s worth discussing this with our advisors here at Mortgage Finder before you finalise your mortgage. It means that we’re able to take your future needs into consideration and pick a mortgage that’s more forgiving on settlement than another.
Remember – your advisor works for you, so the more information you can supply about your situation and needs, the better it is for everyone.
For top-quality mortgage advice in the UAE, give Mortgage Finder a call, or fill out our quick contact form and one of our expert team will get back to you!