How is overpaying on a mortgage different to other finance facilities?
One of the most overlooked items by consumers who take out mortgages are the terms that refer to re-payment. Upon signing on the dotted line, you may not realize just how inflexible these loans may actually be. In most cases these are fixed loans with a pre-determined monthly amount that the borrower is expected to pay towards the outstanding amount (this interest rate can range from 2.9% to over 4%).
Unlike paying off a credit card balance, the repayment of a mortgage does not work the same way. While it’s possible for you to overpay on these types of loans, this may not always be the case with some banks. It would be wise to find out from the lender before singing any documents. Several banks in the UAE allow for overpayment, while others may impose penalties for overpaying (these can range according to your bank).
How do I benefit from overpaying on my mortgage?
The longer the term of the mortgage is, the bigger the benefits to you of overpaying. For example, if you have 15 years left on your AED 550,000 loan, you could actually pay off your loan in 10 years, if you are able to put an additional AED 1,370 per month towards the payments. At an interest rate of 2.9%, you would be saving AED 5,316 in interest by shaving off 5 years on your mortgage.
The decision of taking out a mortgage usually constitutes the biggest financial commitment in a lifetime. There are more than 30 banks in the UAE with over 100 mortgages to choose from. Interest rates have also become a lot more attractive over the last five years. Before you decide to shop around, make sure that you have enough for a down payment (this is 25% of total property value for expats). Paying even more up front is ideal as it will save you a lot in the long run.
Find out what your bank’s rules on overpaying are
What’s most important is that you understand the various types of interest rates and calculate how much you would be paying in interest every year. At the same time, it’s equally important to know beforehand just how much you are allowed to overpay each month and annually. For example, HSBC allows its customers in the UAE to overpay up to 25% of the outstanding loan amount per calendar year. Expats who take out a fixed-term mortgage with Emirates NBD on the other hand can overpay up to 20% of the loan value per year. In the event that you can actually overpay, there are typically two ways of doing this: increasing the amount you pay out on a monthly basis or, processing one-off payments that are higher.