Getting rid of the mortgage obligation early seems like an attractive step for many families, especially those whose financial situation has improved or who have received a bonus or additional liquidity. However, paying off the mortgage early does not necessarily mean paying only the balance shown in the banking application, because the final amount may include compensation to the financier according to specific controls, in addition to expenses that meet the regulatory conditions.
Therefore, before transferring your savings to a bank or finance company, calculate the amount required to close, compare it to the remaining cost of financing, and make sure that the repayment will not deplete the liquidity you need to cover your other expenses and obligations.
What do you pay for early repayment?
Article 88 of the Regulations for the Supervision of Finance Companies, published in the regulations of the Saudi Central Bank, clarifies that the beneficiary may accelerate the payment of the remaining amount of the financing, without incurring the cost of the term for the remaining period. In return, the finance company may claim a specific compensation in accordance with the regulatory controls.
The early repayment amount includes the following:
- The remaining balance of the financing amount: This is the original amount that has not yet been paid, according to the approved repayment schedule.
- Reinvestment cost: may be calculated as not exceeding the cost of the term for the three months following repayment, on a decreasing balance basis.
- Third-party expenses: Expenses paid by the finance company to a third party due to the finance contract may be claimed, if stipulated in the contract and non-refundable, subject to regulatory conditions.
Therefore, the beneficiary may not be charged the cost of the term for the entire remaining period as if the financing had continued until the end of its term, but he may be liable for compensatory amounts permitted by law.
Example with numbers: How is the closing amount calculated?
The Saudi Central Bank explains how to calculate early repayment through an example of a mortgage of one million riyals, over a period of 25 years, with a monthly installment of 4,510 riyals, with a down payment of 300,000 riyals and administrative fees of 5,000 riyals.
If the customer decides to repay the loan early, while still having 120 installments remaining, the outstanding balance of the principal will be approximately 406,200 riyals. An additional fee of approximately 6,100 riyals will be added for the three months following the early repayment. Therefore, the total amount required to close the loan will be approximately 412,300 riyals.
The example confirms that the early repayment amount is not necessarily limited to the remaining financing principal, but may include compensation in accordance with regulatory controls, and the actual value varies from contract to contract according to the remaining balance, financing terms, and legally due expenses.
How do you know if early repayment is worthwhile?
It is not enough to look at the value of the monthly installment or the remaining balance alone, but start by requesting a written offer from the financing entity that specifies the closing amount on a certain date, then compare it to the total installments you would pay if you continued to pay according to the schedule.
Next, review three key elements:
First: Expected savings, through which you can calculate the difference between the total future payments and the closing amount, noting that nominal comparison alone does not reflect the time value of money or the potential return from liquidity investment.
Second: Available liquidity. If the repayment will consume most of your savings, keeping a reserve for emergencies and essential obligations may be more appropriate than immediately getting rid of the financing.
Third: The available alternatives, where you compare full repayment, partial repayment if available according to the terms of your contract and applicable controls, and keeping part of the liquidity to cover other obligations. Do not assume that partial repayment will reduce the installment or financing period in the same way in all contracts. Ask for a written simulation from the financier.
Can the bank prevent you from making early repayments?
Generally, the borrower has the right to expedite the repayment of the remaining amount according to the applicable regulations. However, the mortgage agreement may stipulate a period during which early repayment is prohibited, not exceeding two years from the contract date. Therefore, review the early repayment clause in your agreement and verify that any contractual prohibition period has expired before submitting your application.
What should you do before paying the final amount?
Before making a decision, ask the bank or finance company for an official statement of the early repayment amount and the offer's expiry date. Request a breakdown of the remaining balance, the cost of reinvestment, any third-party expenses and their basis for accrual. Then compare the closing amount with the total remaining installments. Do not rely on informal estimates, and ensure that the amount requested does not deplete your necessary cash reserves.
After payment, proceed with issuing a clearance letter and updating your credit details, and complete the procedures for releasing the mortgage or updating the title deed if applicable to your case.
Paying off your mortgage early can reduce the overall cost and free your family from a long-term obligation, but the right decision starts with a documented figure, not guesswork. Request a closing statement from your lender, check the loan amount, and then weigh the expected savings against the cash you'll have left after the payment.
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