An Expert’s Opinion about Home Loan Prepayment

19May, 21

An Expert’s Opinion about Home Loan Prepayment

Home loan pre-closure is described as a borrower's early repayment of a home loan. This can be done in part or in full, depending on the situation. It's done to take advantage of lower interest rates by optional refinancing and balance transfers. This is also possible if a borrower has sufficient funds and is able to make the full payment sooner than anticipated or as specified in the loan agreement. Is it, however, cheaper to spend the money elsewhere or pay off the debt sooner? Let us find the answer of this question in this particular Blog.

Prepaying the home loan in full or in part until the loan term expires is referred to as prepayment. The majority of home loans are for 15 to 20 years and are considered one of the strongest investments. If you plan to close this earlier than anticipated, you must notify the bank, financial institution, or entity in writing. However, making a pre-payment on your home loan will save you a lot of money that you would have otherwise spent on interest.

If the loan is paid off before the term ends, almost all Loan finance firms and banks charge a prepayment penalty. Some banks would not allow you to do this even though you are able to secure the funds for the prepayment. Prepaying a home loan necessitates the submission of pay slips or the filing of an income tax return, as well as a bank statement.

The Need for Home Loan Prepayment

Prepaying a home loan is a smart move because interest eats up a lot of money. However, giving away a large sum of money as a home loan is not ideal for your own financial wellbeing. Each and every loan that is approved has a specific repayment period. The average loan term in twenty five years. Borrowers tend to pay off their debts early when they receive a large sum of money, such as an annual bonus, money from matured savings, or some other type of income. In most cases, prepayment of a home loan is required because it raises the property's overall cost.

However, there are certain circumstances in which continuing with Home Loan is advantageous.

Let's take a look at all of the potential situations so you can determine whether or not you should go for a pre-payment of Home Loan / pre-closure of Home Loan.

When Should you go for a Home Loan Prepayment?

To begin with, a customer can save a significant amount of money on interest by prepaying their home loan before the end of the term. This is, without a doubt, the best pro for home loan prepayment.

The trick is to pay off the loan in full early on in order to save money on interest. Even if a customer has paid most of the interest and has a surplus of cash later in the term, it is still a good practise to prepay the loan and get some money off your back.

What is the Process of Calculating a Home Loan?

To begin, let's look at how a Home Loan is measured, which will give you an idea of how much it will be worth to make a prepayment on your Home Loan. The principal, interest, real estate taxes, and Home Loan insurance will all be included in your monthly Home Loan payment (if the down payment is less than 20 percent of the purchase price of the home).

The portion of your payment dedicated to principal grows each month, while the portion dedicated to interest shrinks. The interest rate is determined per month based on the current outstanding loan balance.

How does a Home Loan prepayment work?

Your monthly Home Loan payment is a set sum, with a growing portion of that payment going toward principal each month. Since your monthly interest payments are calculated based on the remaining balance on your Home Loan, which is now lower as a result of the prepayment, each subsequent interest payment will be lower.

Prepayment reduces the principal sum owed, resulting in lower net interest costs.

If you plan to pay more on your Home Loan, it will impact the length of your loan and provide you with several benefits, as mentioned below:

Reduce the amount of interest you pay

The additional payments on your mortgage will be dedicated to the principal part when you make prepayments.

This will progressively reduce the principal balance, lowering the amount of interest you'll have to pay for the life of the loan. For those who expect to remain in their current homes for the long term, prepayment on their mortgage offers the best return on investment.

Let's say you have 15 years left on your AED 550,000 loan. If you add an extra AED 1,370 per month to your payments, you will pay off your loan in 10 years. By that the length of your mortgage by 5 years at a 2.9 percent interest rate, you can save AED 5,316 in interest.

The additional payment would be used entirely for the principal part. This helps to shorten the loan period while also lowering the interest rate.

There are over 30 banks in the UAE that can provide you with over 100 mortgage options. Over the last five years, interest rates have also become a lot more appealing, so choose carefully to get the best price. For a mortgage, a minimum down payment of 20% for nationals and 25% for expats is needed. The more money you put down, the better long-term offers you'll be able to find.

Reduce the time it takes to become mortgage-free.

As you can see from the example above, spending more on your mortgage lowers your interest rate while also reducing your mortgage tenure period, allowing you to pay off your loan sooner than expected.

Built Equity

Extra mortgage payments would help you to accumulate equity savings. You can then take advantage of the equity in your home by refinancing or selling it.

Prepayment Rules at the bank

Before you decide to make an extra payment on your mortgage, you can do your research to understand the various forms of interest rates and how they are measured. It is critical to understand how much you are permitted to prepay each month.


Today, most major banks in the UAE offer free partial prepayments up to a certain limit; however, complete prepayments can incur an early settlement fee of 1 to 3%, depending on the loan form and bank.

Banks in the UAE would allow you to prepay on certain terms. For example, HSBC allows its UAE customers to prepay up to 25% of their unpaid loan sum every calendar year. Expats who take out a fixed-term mortgage with Emirates NBD will be able to prepay up to 20% of the loan value every year. Each bank has its own set of terms, so it's best to look over them and speak with your bank about mortgage prepayment.