Early Settlement Penalty
A fee charged by the bank if you pay off your mortgage before the agreed term, capped by UAE Central Bank regulations.
What is Early Settlement Penalty?
An early settlement penalty is a fee charged by the bank when you pay off your mortgage before the agreed tenure, either through refinancing with another bank or by paying the full outstanding balance. Banks charge this because they lose expected interest income. In the UAE, the Central Bank has capped this penalty for variable rate mortgages to protect borrowers.
Early Settlement Penalty in the UAE
UAE Central Bank regulations cap the early settlement penalty for variable rate mortgages at 1% of the outstanding balance or AED 10,000, whichever is lower. For fixed rate mortgages, penalties can be higher and are determined by individual bank policies — they may include a 'break cost' based on the remaining fixed period. Always check your mortgage contract for the specific penalty terms before refinancing.
Worked Example
Outstanding variable rate mortgage: AED 1,200,000. Early settlement penalty: 1% = AED 12,000. But Central Bank cap applies = AED 10,000. Total penalty you pay: AED 10,000. If monthly saving from refinancing is AED 800, break-even is 12.5 months.
Is there always a penalty for early settlement?
Most mortgages include an early settlement penalty, but some banks offer products with reduced or waived penalties after a certain period. Mortigo can identify these options.
Does the penalty apply to partial prepayments?
Some banks allow partial prepayments without penalty up to a certain amount (e.g., 10-25% of outstanding balance per year). Check your specific mortgage terms.