What’s the catch?

In general terms a mortgage overdraft means you get a reserve account with an overdraft that is to the same value as your mortgage.

A mortgage overdraft is secured against your property so should you default and get into a situation where you can no longer keep up with your payments then the mortgage provider has the power to repossess your property.

This makes taking a mortgage overdraft very risky as in the worst-case scenario you could lose your property. Always remember, your home is at risk if you fail to keep up with any loan secured against it. It is similar in some ways to re-mortgaging your home which is a common practice in some countries.

Many people in the UK re-mortgage to have a current account reserve. This means they can withdraw money from the equity of their property, which gives them a false sense of security. The main advantage of the product being offered by ADCB is that you are only actually charged interest on the money you withdraw. So say you have US$48,960 to spend but only want to spend US$5,712 on a holiday, the bank will only charge you interest on the US$5,712. This is a good thing.

They don't give you another load of money in interest and charges from day one. The big problem though is that you are borrowing money against your property and all of it can be used to borrow for things that really do not have any intrinsic value, such as cars or holidays and even worse, securing simple credit card debt against your home by taking the payments over a longer term which is a big no no! Having a lot of money to spend is very tempting and can lure you into a false sense of security, and you do have to pay the money back, it's not free!

However, if you wish to buy land or a second property with the equity available then this is a much better option as you are investing the money that's likely to have some value and of course if you decide to rent the investment property this will also provide an income. This is something several people I know have done. I myself bought a second property from the equity of my other property using a mortgage overdraft.

The 50% cost saving on the overdraft sounds tempting; however, whichever amount you borrow on the overdraft mortgage you are still going to have to pay interest over a longer period anyway.

That's because you are prolonging the time it takes to pay off the mortgage. If you put everything into one payment you would then have a small payment but you make the debt four times as much in the long-term.

As a golden rule you should always invest in debt today to pay yourself tomorrow. What I've seen happen time and time again is that people just end up spending this sort of money on whatever they want. And then before they know it that money has gone and they have a huge debt to pay off.

For further information contact:
Graham Martin Tyrrel
This email address is being protected from spam bots, you need Javascript enabled to view it
Tel: +971-04-348-9330
Mobile: +971-50- 956-9692

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