Mortgage Prepayment Meaning
Mortgage Prepayment is the early repayment of a home loan by a borrower, in part or in full, to take advantage of lower interest rates or finish the loan earlier.
Is it worth making a prepayment on your mortgage?
After getting a mortgage every customer will look the ways to repay the amount with less risk. At the time, when you are financially good enough to pay more than the obligated to pay each month on your mortgage. You need to think plenty before making the choice to put more money towards your mortgage versus using that extra money to invest elsewhere.
In this article, we let you know how a prepaying of mortgage works to you
How is a Mortgage Calculated?
First of all, let’s begin this discussion by how a mortgage is calculated which gives you an idea about worth to make prepayment on your mortgage. Your monthly mortgage payment will include principal, interest, real estate taxes, and mortgage insurance (if the down payment is less than 20% of the purchase price of the home).
Each month of your payment made, the portion dedicated your principal increases, and the portion dedicated to interest decreases. Each month, the interest rate is calculated based on the current outstanding loan amount.
How a prepayment of your mortgage works
You pay a fixed amount each month on your mortgage, with an increasing share of that payment going toward principal every month. Because your monthly interest payments are based on the outstanding balance on your mortgage loan, which is now lower due to the prepayment, every future interest payment will be lower as well.
Prepayment will bring the principal amount down, which results in less interest cost overall.
If you are decided to pay more on your mortgage this affects your period of the loan and reap plenty of benefits as below:
Decrease the amount of interest paid
As you make a prepayment on your mortgage the extra payments will be dedicated to principal portion .which will reduce your principal amount gradually that will also lower the amount of interest you’ll have to pay the term of the mortgage. prepayment on your mortgage provides the biggest return on investment for those who are planning on staying in their current homes for the long term.
To explain this let’s say 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 extra payment will be completely dedicated to the principal portion. Which tends to reduce the period loan along with interest amount.
In UAE, There more than 30 banks which can offer you over 100 mortgages to choose from. Interest rates have also become a lot more attractive over the last five years, So choose wisely to get the best deal. A minimum down payment of 20% for national or 25% for expats is must for a mortgage. If you deposit more the greater deals you can find for the long run.
Shorten the time needed to end up mortgage-free
From the above example, you can see when paying more on your mortgage that not only lower your interest rate but the tenure period also reduced(15 years to 10 years)by which you set free from mortgage earlier than the given time.
Extra payments on your mortgage will allow you to build equity savings. You can then use the equity in your home through a refinance or upon the sale of your property.
Bank rules on prepayments
Before you choose to extra payment on your mortgage you need to do some homework and have a thorough idea of different types of interest rates and how they are calculated. It is must to know how much you are allowed to prepay each month and annually.
Major banks in UAE today offers free partial prepayments up to a certain limit, full payment will have an early settlement fee of 1 to 3% depending on the loan type and bank.
Banks in UAE will allow you to do prepayment on certain terms like HSBC allows its customers in the UAE to prepay up to 25% of the outstanding loan amount per the calendar year. Emirates NBD will allow expats who take out a fixed-term mortgage can do prepayment up to 20% of the loan value per year. Each bank have its own terms it is better to take look and have talked with your bank about the mortgage prepayment.