Some borrowers choose to pay off their loan before the end of the term, to shorten the life of their borrowing contract and save on interest charges.
Those who take this quicker repayment route have either managed to raise some surplus funds or found another lender offering to buy out their debts.
While it may seem like a smart idea, most loans in the UAE are somewhat set in stone. They are unbendable, usually designed to be paid over the full term, so there are fees you have to pay in case you decide to get rid of your financial obligations fast.
Most banks in the UAE collect a certain fee, which comes under different names like early redemption, early settlement or a pre-payment fee. The going rate in the UAE is between one and three per cent of the outstanding balance. Charges vary greatly across products and lenders, and in some cases, the earlier the loans are settled, the higher the charges are.
Settlement fees will also depend on how the balance is paid. Paying off with the customer's own money may be cheaper as opposed to cases where other lenders buy out a particular loan. There are, however, banks that do away with the standard settlement fee, but still impose an administration charge.
In addition, borrowers may be required to pay a cancellation fee of Dh100, on top of the standard cost. In almost all cases, it is not possible to avoid paying extra charges if a borrower decides to discontinue the monthly payments, as agreed at the outset. However, banks argue that the fees are very minimal.
"Products differ greatly from bank to bank and the charges and terms that apply will vary too. Where they are part of a product, it is usually not possible to settle a loan without paying early redemption charges," says Richard Musty, managing director of Lloyds TSB in the Middle East.
Suvo Sarkar, general manager for consumer and elite banking at the National Bank of Abu Dhabi (NBAD), points out that by paying off the loan before maturity, the customer saves the interest that otherwise would have been paid over the remaining period of the loan. "The bank therefore charges an early settlement fee for the interest foregone based on the contracted period with the customer."
"We regret that these fees cannot be avoided in case of loan settlement prior to maturity. However, it is to be noted that the early repayment fees applied are much lower than the interest rates applicable on the respective loans," an ADCB spokesperson says.
Following a Central Bank regulation issued early this year, most banks have imposed uniform early redemption fees on personal loans and car loans. NBAD, Mashreq, Emirates NBD, Abu Dhabi Commercial Bank (ADCB), Standard Chartered and HSBC currently charge one per cent of the remaining balance.
Lloyds TSB, on the other hand, doesn't levy any early repayment penalties on both personal loans and car loans.
Mortgage fees, however, vary across banks. At HSBC, no early settlement charge is imposed if the customer pays off the balance from his or her own funds, but an administration fee of Dh2,500 is applied. Those who settle the loan through other financiers will have to pay three per cent of the balance.
Mortgage borrowers at Mashreq can also pay a maximum of three per cent of the balance if they settle the loan through other banks, and if they choose to pay with their own funds, the fee can be a maximum of two per cent. The pre-payment fee for mortgages at Emirates NBD can range between one per cent and three per cent. A takeover of a home loan by another financial institution will cost three per cent, but if the customer clears his debt with his own funds, the charge will be two per cent within the first two years, and one per cent if paid off after two years.
At ADCB, paying off a mortgage up to three years into the term will cost two per cent of the balance. Settling the mortgage between three and five years into the term will cost one per cent of the outstanding amount. However, no charge will be levied if the mortgage is settled more than five years into the loan. If the borrower uses other lender's funds, the settlement fee is higher, three per cent.
Standard Chartered currently offers a zero settlement fee on mortgage products, so those who choose to take out a home loan now will not have to worry about early repayment charges.
However, customers who have taken loans prior to this offer will have to pay up to two per cent of the balance, depending on their loan terms.
Lloyds TSB charges an early repayment fee of up to 1.5 per cent of the mortgage balance, depending on the loan type and amount. "We undertake a thorough income and expenditure analysis to ensure that our customers do not overextend the amount they borrow, and that they can afford to make the level of repayments required," says Musty.