Before you apply for a mortgage loan, it is advisable to learn about the repayment options available to you. This helps to ascertain your future outflows and enables you to make arrangements to accommodate them.
The basic elements of a mortgage are the principal and interest. Principal is the original loan amount you borrow from your bank while interest is a charge levied by the bank on the money lent to you. Repayment consists of these two basic elements either individually or a combination thereof.
Note that you can opt for a fixed or a variable rate of interest on your mortgage loan. If you have opted for a fixed rate, referred to as a “vanilla wafer” mortgage loan, the interest rate remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float”. These variable rates fluctuate depending on various market factors and can change any time during the term of the loan.
Moving further, let’s learn about the repayment options available to you:
Mortgage Repayment Options
Repayment mortgage [Principal + Interest]
This is the most common repayment method opted by most borrowers. It consists of repaying an amount of the principal and interest every month for the entire mortgage term until both these elements are paid off. Note that the amount of the mortgage loan reduces every month as you keep making the repayments.
Initially, repayments consist of a larger component of interest and less of the principal. Towards the end of the mortgage term, your repayments will largely involve the principal amount and a small amount of interest.
A mortgage term in the UAE typically lasts for 25 years, but it can vary depending on your nationality and occupation.
Use our Repayment Calculator to estimate your repayments.
Interest only mortgage
Under this option, you pay back the interest for the initial period without paying any principal amount. Your initial repayment amount will be less as it will consist of the interest component only and you will be left with the unpaid principal amount towards the end of the mortgage term. This option is usually offered for a maximum term of 5 years.
Note that this approach is risky and there is an upward trend wherein people selecting this option are re-mortgaging the property to an alternate lender. Many don’t have any plans to pay off the capital amount and re-mortgage the property to keep paying the interest only. This is usually done till there is a rise in the property prices. Owners then sell the property and move to a smaller house with the price difference being used to pay off the mortgage loan.
Compare mortgage loans offered by banks in the UAE by clicking here
Part Repayment and Part Interest Mortgage
This option combines the above two options which means that borrowers will still owe a part of the principal amount towards the end of the mortgage term. Terms of the mortgage vary depending on the lender. Besides this, your lender will ask you to get loan protection insurance as a requirement for the mortgage loan. It protects the bank by paying off the loan amount in the event of a death. Insurance companies provide options for disability and terminal illness as well.
To summarize the above, take steps to select an affordable repayment option, one that does not give you any unforseen surprises in the future. Schedule a meeting with the bank representative to understand the repayment methods offered on different mortgage loans and choose one that is most suitable to you.
You can compare mortgage loans offered by banks in the UAE by clicking here