Offset mortgages in the UAE provide a smart way to manage home loans while maximising savings. This innovative structure helps borrowers save money and shorten loan terms. Popular among individuals seeking flexibility and financial efficiency, several leading banks in the UAE offer offset mortgages. Understanding offset mortgages can help you make informed decisions about your financial future.
What is an Offset Mortgage?
An offset mortgage is a financial arrangement that links a borrower’s mortgage account with their savings and/or current accounts within the same bank. In this setup, the linked savings or current account balance is used to offset the outstanding mortgage principal.
Consequently, interest is calculated on the net balance (i.e., the mortgage loan amount minus the savings), potentially reducing the total interest paid over the loan’s tenure. This structure allows borrowers to utilise their savings more effectively, ensuring that idle funds contribute to lowering mortgage costs. Furthermore, getting a mortgage pre-approval in Dubai can streamline your property purchase process.
How Offset Mortgages Work
The borrower’s savings and mortgage accounts are interconnected in an offset mortgage arrangement. Instead of earning interest on the savings account, the bank uses the savings balance to reduce the principal amount on which the mortgage interest is calculated.
For instance, if a borrower has a mortgage of AED 1,000,000 and maintains AED 200,000 in a linked savings account, interest will be charged only on AED 800,000. This mechanism can lead to substantial interest savings and may shorten the mortgage if repayments remain consistent.
Banks Providing Offset Mortgages in the UAE
Several banks in the UAE offer offset mortgage products, each with its unique features and benefits:
Standard Chartered Bank
The banks’ ‘MortgageOne’ product links the client’s current account with their home loan, allowing interest to be calculated on the difference between the loan and account balances. This setup enables borrowers to reduce their interest payments and shorten their loan tenure.
Abu Dhabi Commercial Bank (ADCB)
ADCB’s ‘Mortgage Home Saver’ loan offers a unique solution that helps clients save on interest costs. The loan is linked to a flexible interest-bearing account and financing is available for up to 85% of the property value for UAE nationals and 80% for expatriates.
RAKBANK
RAKBANK offers the ‘Home in One’ account, combining a mortgage loan with a current one. This integration allows clients to offset their loan balance with deposits in their current account, thereby reducing the interest payable on the mortgage.
Pros of Offset Mortgages
Offset mortgages present a range of pros and cons of offset mortgages that borrowers should consider. The types of mortgage in Dubai you choose depends on your personal preferences.
Save on Interest
Offset mortgages let you use your savings to reduce the amount of your mortgage on which interest is calculated. For example, if you owe AED 1,000,000 on your mortgage and have AED 200,000 in savings, the interest is calculated on AED 800,000 instead of the full amount. This can lead to significant savings on interest payments over the loan term, especially if you maintain a healthy savings balance.
Flexible Savings Access
Unlike traditional overpayments, where you permanently pay extra into your mortgage, offset mortgages allow you to keep your savings accessible. You can withdraw your savings anytime, so you are not locking away your money. This flexibility can be useful for emergencies or unexpected expenses, giving you peace of mind while reducing mortgage costs. For this reason, there are some factors which you should consider before getting a mortgage in Dubai.
Pay Off the Loan Faster
Since your savings help lower the interest charged, more of your monthly payment goes toward the principal amount of the loan. This means you could finish paying off your mortgage earlier than planned. Paying off your home loan in Dubai faster reduces your long-term financial burden and allows you to focus on other financial goals.
No Tax on Savings
With an offset mortgage, your savings do not earn interest. Instead, they help lower your mortgage interest costs. This can be beneficial in countries or situations where savings interest is taxable. You effectively use your savings to save on mortgage interest without worrying about paying tax on interest income.
Works for Any Amount
Even small amounts of savings can have a positive impact on reducing your mortgage interest. For example, having AED 20,000 in your account might seem minor compared to a large loan, but it still reduces the principal amount used to calculate interest. Over time, these small savings add up and help you lower overall costs.
Cons of Offset Mortgages
Before you plan to secure a mortgage, it is better to understand the structure of mortgages in Dubai. Find the cons of offset mortgages explained below:
Higher Interest Rates
Offset mortgages often come with slightly higher interest rates compared to standard mortgages. This is because they offer added flexibility and benefits. For some borrowers, the higher rate may offset the savings they gain, especially if they do not maintain a large savings balance. It is important to calculate whether the benefits outweigh the extra cost.
No Interest on Savings
In an offset mortgage, your savings do not earn interest. This may not be a concern when savings interest rates are low. However, it can be a drawback when savings accounts offer higher returns. If the interest you earn exceeds the savings on the mortgage, you might miss out on potential income.
FAQs
How do mortgage offset accounts work?
A mortgage offset account is linked to your home loan. The balance in this account reduces the portion of your loan amount that accrues interest.
Can I access my savings in an offset mortgage account?
Yes, savings in an offset account remain accessible. You can withdraw money whenever needed without penalty. However, withdrawing reduces the offset balance, increasing the interest on your mortgage.
Are offset mortgages available to non-residents in the UAE?
Some UAE banks offer non-resident mortgages, but the eligibility criteria vary. It’s better to consult the bank websites to obtain more information.
Offset mortgages in the UAE offer a strategic avenue for homeowners to manage their mortgage liabilities more effectively by leveraging their savings. As with any financial product, it’s essential to assess personal circumstances, consult financial advisors and thoroughly compare offerings from different banks to determine the most suitable mortgage solution.
Besides, you can consider other mortgages when buying a property in the UAE. The type of mortgage you select depends on your financial circumstances and long-term plans. Go through these FAQs on getting a mortgage in Dubai to understand the process further.
To stay updated with all the information about mortgages in the UAE, keep visiting UAE’s top property blog.
