If you have a bonus, a maturing deposit or sale proceeds and wonder whether to throw it at your home loan, mortgage partial prepayment UAE rules decide the answer more than the headline interest rate does. Pay part of the balance early and the interest saved can run into the hundreds of thousands of dirhams on a long loan. But the bank’s free annual allowance, the Central Bank’s fee cap and the choice between a shorter term and a lower instalment all change the result. Most guides explain the fee. Few show the maths. This one does.
Published: 20 October 2026
Everything below is general information. Your own offer letter and facility terms always decide what your bank actually charges.
Direct Answer: What Does Partial Prepayment Save, and What Does It Cost?
A partial prepayment cuts the principal on which interest is charged, so every dirham you prepay early saves roughly your loan rate for each remaining year. In the worked example below, an AED 200,000 lump sum on a AED 1.5 million, 25-year loan at 4.50% shortens the term by about 57 months and saves about AED 282,000 in interest. The cost is usually zero up to your bank’s free annual allowance, and above it the Central Bank caps the fee at 1% or AED 10,000, whichever is lower, plus 5% VAT. Both are described in the sections that follow.
What Counts as Partial Prepayment on a UAE Mortgage?
A partial prepayment, sometimes called an overpayment or partial settlement, is any lump sum you pay toward your outstanding principal on top of your normal monthly instalment, without closing the loan. It is different from full early settlement, where you clear the whole balance. Our guide on early mortgage settlement and the penalty cap covers the full-settlement case, including settling through a sale. This article is only about the partial case and the savings maths.
Two practical points apply before any numbers:
- It goes to principal, not to future instalments. Ask the bank to confirm in writing that the money is applied to principal and what happens to your instalment afterwards (see the next section).
- It is a separate request. Adding extra to a monthly transfer does not always count as a prepayment. Banks usually want a written request or a settlement letter first.
Reduce Term or Reduce EMI? The Choice That Changes Your Saving
After a lump sum, the bank can do one of two things, and which one applies depends on the bank and your contract, so ask which is the default and whether you can choose:
- Keep the EMI and shorten the term. You keep paying the same amount each month and the loan simply ends sooner. This saves the most interest.
- Keep the term and lower the EMI. The balance falls, the instalment is recalculated over the remaining months, and your monthly cash flow improves. This saves less interest but gives breathing room.
The worked example
To avoid made-up round numbers, the example is anchored to current market conditions. The Central Bank of the UAE raised its Base Rate by 25 basis points to 3.90% with effect from 17 September 2026 (reported by Gulf News on 16 September 2026). Broker rate comparisons for October 2026 show 2 to 3 year fixed rates of roughly 3.89% to 4.49%, 5-year fixed rates of roughly 4.19% to 5.05%, and variable rates at EIBOR plus 1.00% to 1.99% (indicative figures from a Mortgease October 2026 comparison; your offer will differ). The example uses 4.50%, which sits inside those ranges.
- Original loan: AED 1,500,000 over 25 years (300 months) at 4.50%
- Monthly instalment (EMI): about AED 8,337
- Position now: 36 instalments paid, 264 months left, outstanding balance about AED 1,395,661
- Interest still to pay on the current schedule: about AED 805,435
Now compare what happens if you prepay a lump sum today.
| Lump sum prepaid | Option A: keep EMI, shorter term | Interest saved (A) | Option B: keep term, lower EMI | Interest saved (B) |
|---|---|---|---|---|
| AED 100,000 | Ends 30 months sooner (234 months left) | about AED 154,000 | EMI falls by about AED 597 to about AED 7,740 | about AED 57,700 |
| AED 200,000 | Ends 57 months sooner (207 months left) | about AED 282,100 | EMI falls by about AED 1,195 to about AED 7,143 | about AED 115,400 |
| AED 400,000 | Ends 105 months sooner (159 months left) | about AED 478,200 | EMI falls by about AED 2,389 to about AED 5,948 | about AED 230,800 |
Figures are our own amortisation calculations using the stated assumptions: constant 4.50% rate, monthly compounding, no fees. A variable-rate loan will move with EIBOR, so treat the output as an illustration, not a quote.
How to read the table
- Option A saves roughly twice as much interest as Option B for the same lump sum. Keeping the old EMI means every future instalment now attacks a smaller balance. That is the whole advantage.
- Option B is a cash-flow tool, not a savings tool. If your priority is a lower monthly commitment, for instance to improve your debt burden ratio for another purchase or to prepare for lower income, B makes sense. It still saves interest, just less.
- Rule of thumb: a prepayment saves close to your loan rate times the amount, for each year of the loan left. AED 100,000 at 4.50% is about AED 4,500 of interest in the next twelve months alone, and the saving compounds because it also shrinks the later balances.
You can also pair the two: prepay, take Option A to shorten the term, and later ask the bank whether it will restructure if cash flow tightens. Restructuring terms are the bank’s discretion, so do not assume it.
One-Off Lump Sum vs Yearly Extra Payments
Suppose you cannot find AED 200,000 today but can find AED 50,000 each year. Using the same loan and keeping the EMI constant:
| Strategy | Total prepaid | Months cut from the term | Interest saved |
|---|---|---|---|
| AED 200,000 once, today | AED 200,000 | 57 months | about AED 282,100 |
| AED 50,000 at each of the next 4 yearly anniversaries | AED 200,000 | 52 months | about AED 236,100 |
The same AED 200,000 saves about AED 46,000 more when it goes in at the start, because it stops accruing interest sooner. The lesson is not that yearly payments are bad: AED 236,100 saved from an affordable habit is excellent. It is that time matters more than size, so prepay as early as your free allowance and cash buffer allow.
The Fee Trap: Allowance, Cap and VAT
What the Central Bank rule says
The Central Bank of the UAE amended the fee table in Appendix 2 of Regulation 29/2011 through Decision No. 96/By Circulation/2019, which reduced the early and partial settlement fee on home loans to a maximum of 1% of the outstanding balance or AED 10,000, whichever is less. The table lists partial settlement charges alongside full settlement. As quoted by Bayut’s explainer on the circular, the wording is “outstanding balance”, and fees are stated excluding VAT. With 5% VAT added, the effective ceiling is 1.05% or AED 10,500.
The disagreement you should know about
Sources do not fully agree on what the 1% is applied to:
- The circular wording as quoted by Bayut, and a MortgageCompare explainer, describe it as a percentage of the outstanding balance.
- Some bank-practice summaries, and our own early settlement guide, describe it as a percentage of the amount being settled.
- The same MortgageCompare article also says the fee applies “to full settlement only in most standard mortgage contracts”, while the Central Bank table lists partial settlement charges too.
For a partial prepayment this is not a small point. If the base is the amount you prepay, a AED 400,000 prepayment costs a maximum of about AED 4,200 including VAT. If the base is your outstanding balance, the same prepayment can hit the AED 10,500 ceiling even though you are only paying part of the loan. Your offer letter will say which one your bank uses, so check it before you transfer the money. If the letter is unclear, ask for the fee in writing as a dirham figure for the exact amount you plan to prepay.
Free annual allowances differ by bank
Most banks let you prepay a percentage of the loan each year without any fee. Only the excess is charged. The published figures vary a lot:
| Bank | Free partial prepayment per year (as published by third parties) | Notes |
|---|---|---|
| ADCB | 30% | No fee-free exceptions listed |
| ADIB | 30% | No fee-free exceptions listed |
| Standard Chartered | 30% | Fee-free from year 6, and on property sale, per the comparison source |
| HSBC | 25% | Fee-free after year 7 on fixed-rate and after year 3 on variable-rate loans |
| Mashreq | 25% | No fee-free exceptions listed |
| Arab Bank, United Arab Bank | 25% | No fee-free exceptions listed |
| RAKBank | 25% (Elite), 20% (non-Elite) | Allowance applies after any fixed period |
| Emirates NBD | 20% of the loan amount | The bank’s expat mortgage page also lists a 1.05% fee, capped at AED 10,500, above the allowance |
| Commercial Bank of Dubai | 15% | No fee-free exceptions listed |
| FAB, Dubai Islamic Bank, Emirates Islamic, Ajman Bank, NBF | Not confirmed | Published figures conflict or are absent; some sources cite FAB up to 25%. Confirm with the bank |
Allowances come from a Kredium bank comparison and, for Emirates NBD, the bank’s own expat mortgage page as surfaced in search results; they are third-party summaries, not a substitute for your contract. One other source places the typical figure nearer 10%, labelled as indicative. The spread, 10% to 30%, is the point: your allowance depends on your bank, your product and sometimes the year of the loan.
Is the allowance on the original loan or the current balance?
This is another detail that changes the answer. Emirates NBD describes its allowance as a percentage of the loan amount. Other banks may use the outstanding balance or the balance at the start of the year. In our example, 20% of the original AED 1.5 million is AED 300,000, but 20% of the current balance of AED 1,395,661 is about AED 279,132. Ask which one applies, and whether the allowance resets each calendar year or each loan anniversary.
Worked fee example: AED 400,000 prepayment at a 20% bank
Take the AED 400,000 prepayment from the table above and assume a bank with a 20% allowance measured on the current balance (about AED 279,132):
- Free portion: AED 279,132
- Excess: about AED 120,868
- If the 1% applies to the amount over the allowance: about AED 1,209 plus VAT, so roughly AED 1,269
- If the 1% applies to the whole outstanding balance: 1% of AED 1,395,661 is AED 13,957, capped at AED 10,000, plus VAT: AED 10,500
The interest saved on that AED 400,000 is about AED 478,200 (Option A). Even at the higher fee of AED 10,500, the fee is about 2% of the saving. The fee almost never makes prepaying a bad idea. It makes a difference to timing and tactics:
- Stay inside the allowance. If you can split the money, prepay up to the allowance now and the rest after the allowance resets. Check whether the reset is by calendar year or loan anniversary. Two prepayments straddling a reset can be fee-free where one big one is not.
- Do the sums on the delay. In the example, waiting six months to avoid a AED 1,269 fee would cost roughly AED 9,000 in extra interest on the AED 400,000 delayed (about 4.50% over half a year on AED 400,000). Avoiding the fee is not always worth the wait.
- Ask for the dirham figure first. A settlement or recalculation letter from the bank showing the exact fee and the new balance removes the guesswork.
Fixed-Rate Break Clauses on Top of the Cap
If you are in a fixed-rate period, there can be additional restrictions beyond the Central Bank cap. Published sources show that some banks restrict or price prepayment during the fixed period: for example, HSBC’s fee-free windows are listed as starting after year 7 for fixed-rate loans and after year 3 for variable-rate loans, and RAKBank’s allowance applies after any fixed period. We could not verify any bank-published break-cost formula this session, so we are not quoting one. Before prepaying during a fixed period, ask the bank in writing:
- Is any prepayment allowed during the fixed period, and how much?
- Does the free allowance apply during the fixed period, or only after it?
- Is there any charge in addition to the Central Bank-capped fee?
If you are approaching the end of a fixed term, read our guide on what happens when your fixed rate ends first. The roll-off date is usually the cheapest and cleanest moment to prepay or switch.
Should You Prepay, Keep Cash, or Refinance?
Prepaying is a guaranteed saving at your loan rate, but it is not automatically the best use of the cash. Weigh these points:
- Keep an emergency buffer first. Prepaid money cannot be pulled back out of the mortgage without applying for credit. A common planning rule is to hold several months of expenses plus instalments in cash before prepaying (that is our suggestion, not a regulation). Read our guide on job loss and mortgage protection if your income is not guaranteed.
- Clear costlier debt first. A credit card or personal loan costs more than a mortgage. See which debts to clear first before borrowing.
- Compare with your cash’s alternative. If your savings earn less than your mortgage rate, prepaying wins on pure maths. If you have a higher-return use and tolerate the risk, the comparison changes.
- Variable rate? The case is stronger. After the September 2026 Base Rate rise, variable-rate borrowers are exposed to higher EIBOR at reset. Our variable rate stress test shows what a 1% move does to the instalment, and our rate hike explainer covers the news. Lower principal means a smaller shock.
- A better deal exists? If another bank offers a materially lower rate, switching may beat prepaying. Compare using our refinancing guide, because switching has its own costs, and you can combine both: refinance, then prepay at the new bank.
- Do not forget liquidity. If you may later want cash from your property, our guide on equity release and top-ups shows how that works, but access is not guaranteed and depends on a new bank assessment.
How to Ask Your Bank for a Prepayment Quote
- Find your facility terms. Search your offer letter or key facts statement for “partial settlement”, “prepayment” or “early settlement”.
- Ask four questions in writing: What is the free allowance, and is it on the original loan or the current balance? Is the fee on the amount prepaid or on the outstanding balance? Does the allowance reset by calendar year or loan anniversary? Will the EMI stay the same and the term shorten, or the other way round?
- Request a recalculation letter. It should show the new outstanding balance, the new end date (or new EMI), and the fee in dirhams.
- Confirm the application date. Ask when the money starts reducing interest, because some banks apply it at month-end or on the instalment date.
- Keep every document. Keep the letter and the payment receipt. A mistaken charge is easier to challenge with paper in hand. The Central Bank circular also required banks to refund overcharges within 30 days of notice, according to the Bayut explainer cited above.
Common Mistakes With Partial Prepayment
- Prepaying without asking for Option A or B. If the bank defaults to the one you did not want, it can be awkward to change later.
- Assuming the fee is zero. It is zero only within the allowance.
- Forgetting VAT. The cap is 1% or AED 10,000, before VAT, which makes AED 10,500 the real ceiling.
- Ignoring fixed-rate terms. Restrictions may apply in addition to the cap.
- Draining the emergency fund. Prepayment is a one-way door.
- Splitting badly. Two payments in the same allowance year can add up to more than the free amount.
Frequently Asked Questions
Can I make a partial prepayment on my UAE mortgage?
Yes. Banks generally accept partial prepayments, and the Central Bank’s fee table has a specific line for partial settlement charges. The process, minimum amounts and the free allowance are set by your bank, so check your offer letter.
What is the maximum fee for partial prepayment on a UAE mortgage?
The Central Bank cap is 1% or AED 10,000, whichever is lower, excluding VAT. With 5% VAT, that is effectively 1.05% or AED 10,500. Many banks charge nothing up to an annual allowance, and the cap applies above it.
Is the 1% fee based on the amount I prepay or my outstanding balance?
Sources disagree. The circular wording as quoted by Bayut says “outstanding balance”, while some bank-practice summaries describe the amount settled. Your offer letter decides. Ask the bank to state the fee in dirhams for your planned amount before you pay.
How much can I prepay each year without a fee?
It depends on the bank. Third-party comparisons list roughly 15% to 30% for different banks, such as 30% at ADCB, 25% at Mashreq and HSBC, and 20% at Emirates NBD, while one source cites about 10% as typical. These are not guaranteed, so confirm your own figure.
Is it better to reduce the term or reduce the EMI?
Reducing the term (keeping the EMI) saves more interest. In our example, AED 200,000 saves about AED 282,100 with the shorter term versus about AED 115,400 with a lower EMI. Lowering the EMI helps monthly cash flow and your debt burden ratio instead.
Is one big lump sum better than yearly extra payments?
Earlier money saves more. In the example, AED 200,000 today saves about AED 46,000 more than AED 50,000 added each year for four years. Yearly payments are still very worthwhile if a lump sum is not available.
Does prepaying during a fixed-rate period cost more?
It can. Some banks restrict or price prepayment during the fixed period, and some fee-free windows only start after a set year. We could not verify a bank-published break formula, so ask for the terms in writing before you pay.
How long does it take for the bank to process a prepayment?
Processing time depends on the bank and is not set by a regulation we could verify. Ask for the application date in writing, because the day the money reduces your balance determines how much interest you save.
Should I prepay my mortgage or keep the cash?
Keep a cash buffer first and clear costlier debt such as cards and personal loans. After that, prepaying earns a guaranteed return equal to your loan rate, which is attractive if your savings earn less. Variable-rate borrowers have an extra reason to cut the balance.
Can I prepay and refinance at the same time?
Yes, but plan the order. Compare the rate difference and the costs of switching first. Some borrowers refinance to a cheaper rate and then prepay under the new bank’s allowance.
Talk to Al Ghaf Before You Move Your Cash
Al Ghaf Mortgage offers two services: Mortgage Consulting and Banking Consultation. If you are deciding between prepaying, holding cash or switching banks, we can help you work through the numbers and the questions to put to your bank. Use our Contact Us page to start, or message us directly:
Message Al Ghaf on WhatsApp: +971 50 127 6925
This article is general information, not legal or financial advice. Rates, fees and rules change; confirm current figures with your bank before signing or paying.