Set to 25 years, the maximum tenure provided on a mortgage loan in the UAE is very long compared to any other kind of loan. Mortgage holders can clear the debt prior to the repayment period, but the banks/financial institutions charge an early settlement fee. This early clearance fee at some of the banks in the UAE was up to 3 per cent of the outstanding loan. Since the capital is often pretty large, this can be quite expensive and can be a hurdle when clearing the mortgage early or opting for a refinancing option.
Previously in the UAE, the early settlement fee on a mortgage was 1 per cent. In June last year the UAE Central Bank raised it to 3 per cent, where mortgage lenders could levy up to 3 per cent of the outstanding loan amount as an exit fee. As of October 2019, considering the disadvantages, the Central Bank has reverted to the least of either 1 per cent of the outstanding loan amount or Dh10,000. One key benefit is that it would encourage borrowers to clear the loan prior to the schedule or choose a remortgage option if they find a lender offering better benefits on the loan, which can ultimately save money.
Banking customers who have already cleared their mortgage by paying 3 per cent of the outstanding loan amount or any value more than 1 per cent of the outstanding loan amount can visit their lender to get a refund of the extra amount paid. In addition to the reduction in the early redemption fee, the Central Bank has also lifted the maximum age criterion for a mortgage loan. Usually, the borrower should not be more than 70 years old at the time of loan repayment. Now the maximum age limit will be decided by the lender itself. The removal of the age cap opens more opportunities for certain investors in the real estate sector.
Net positive effect
Early this year, there was a reduction in interest rates for mortgage loans. Combined with the reduction in the exit fee and age cap, this will have a net positive impact on the real estate market. Altogether these positive developments can boost property sales in the UAE and encourage new investors to enter the market. Mortgage borrowers can save a significant amount of money not only on the interest rate but also in the early redemption charges if they wish to clear the loan prior to the assigned period.
— Nikitha Devi is senior analyst at mymoneysouq.com.