Reducing Balance Mortgage
A reducing balance mortgage calculates interest on the declining outstanding principal after each payment, resulting in lower total interest costs compared to flat-rate structures, standard in UAE conventional mortgages.
| Interest Calculation | Method |
| Month 1 | Interest on full principal |
| Month 2 | Interest on (Principal - Month 1 payment) |
| Month 3 | Interest on (Principal - Month 1&2 payments) |
| Final month | Interest on tiny remaining balance |
| Comparison Example | AED 2M, 5%, 20 Years |
| Reducing balance total interest | AED 1,168,000 |
| Flat rate equivalent | AED 2,000,000 |
| Savings | AED 832,000 (41.6%) |
| Prepayment Impact | Benefit |
| Extra payments | Reduce principal immediately |
| Interest savings | Compound over remaining term |
| Term reduction | Significant with consistent extra payments |
Related Terms
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