The early repayment fee, tier by tier
Repaying a home loan ahead of schedule is a breach of the bank’s revenue plan, and the credit agreement prices that breach. In Vietnam the price is almost always a percentage of the amount repaid early, on a tier that falls with each contract year, and it stops entirely after the fifth.
A representative tier table
Fee schedules vary between banks and between products at the same bank, but the shape is remarkably consistent. The default in the loan inspector reflects the most common pattern:
| Contract year | Fee on the amount repaid early | On a 2.16 billion dong settlement |
|---|---|---|
| Year 1 | 3.0% | 64,800,000 |
| Year 2 | 2.0% | 43,200,000 |
| Year 3 | 1.5% | 32,400,000 |
| Year 4 | 1.0% | 21,600,000 |
| Year 5 | 0.5% | 10,800,000 |
| Year 6 onwards | Nil | Nil |
Two details in that table are worth stating explicitly, because they are the two that borrowers get wrong.
It is charged on the amount repaid, not the original loan
A 3% fee on a 2.4 billion dong loan sounds like 72,000,000 dong. It is not, unless you settle on day one. The fee applies to the sum you actually hand over early. By month twenty-four of the loan used throughout this site, 240,000,000 dong of capital has already been repaid on schedule, so the outstanding balance is 2,160,000,000 dong and the year-two fee at 2% is 43,200,000 dong.
The corollary is that the fee falls for two reasons at once as the loan ages: the percentage drops each year, and the balance it applies to drops every month. By month sixty the outstanding balance is 1,800,000,000 dong and the year-five tier is 0.5%, so the penalty is 9,000,000 dong. That is three-eighths of one percent of the original loan.
The contract year is not the calendar year
Tiers run from the date in the credit agreement, or in some contracts from first drawdown, which on an off-plan purchase can be months apart. Settling on the last day of contract year two and the first day of contract year three are different transactions. On the figures above the difference is 43,200,000 against 32,400,000 dong, so 10,800,000 dong for waiting a day.
Whether it is worth waiting is a straight comparison, and it is easy to get backwards. Waiting saves the tier step but costs interest on a balance you could have cleared. Interest on 2,160,000,000 dong at 11.5% runs at 20,700,000 dong a month, so roughly 690,000 dong a day. A tier step worth 10,800,000 dong therefore pays for about sixteen days of waiting and no more. Within a fortnight of the boundary, wait. Two months out, settle now and take the higher tier.
The clause that catches monthly overpayments
This is the part that surprises people. Many contracts define early repayment to include any payment of principal in excess of the scheduled instalment, not only a full settlement. Under that wording, a borrower who pays an extra 10,000,000 dong a month to clear the loan faster is charged the prevailing tier on every one of those payments.
In year two that is 2% of 10,000,000 dong, so 200,000 dong a month, or 2,400,000 dong a year. It does not sound like much and it usually is not fatal, but it changes the arithmetic of overpaying, and it is invisible unless you look for it. The loan inspector has a switch for exactly this clause, so you can see the effect of turning it on and off against your own figures.
Some contracts instead allow a free allowance, commonly up to 10% or 20% of the outstanding balance in any twelve month period, with the fee applying only above it. That is a materially better contract and it is worth asking for by name.
What settling early actually costs, all in
The penalty is rarely the whole bill. Settling in month twenty-four on the loan used here produces this:
| Component | Amount |
|---|---|
| Outstanding balance | 2,160,000,000 |
| Early repayment fee, year 2 at 2% | 43,200,000 |
| Clawback of discounted promotional interest | 107,870,000 |
| Total to close the loan | 2,311,070,000 |
The clawback is two and a half times the penalty, and it is a different clause in a different appendix. It is dealt with in the clause that takes back the discount. The combined effect on the price of the loan is severe: held to term, this loan has an effective rate of 11.392% a year; settled in month twenty-four, it has an effective rate of 13.014%. Settled in month sixty, when the tier is 0.5% and the clawback window has closed, it is 11.033%, which is cheaper than holding it to term.
The general shape: an early settlement in years one to three is expensive, and from year four onwards, once the clawback window has closed and the tier has fallen, it is usually cheaper than holding the loan to term. The exact crossover depends on your tiers and your clawback window, which is what the tool is for.
Six things to establish before signing
- The percentage for each of the first five contract years, in writing.
- Whether the fee applies to the amount repaid or to the original loan amount.
- Whether partial overpayments are treated as early repayment.
- Whether there is an annual free allowance, and how much.
- Whether the fee is waived when refinancing within the same bank, which many banks do and almost none volunteer.
- Whether the contract year runs from signature or from first drawdown, and the exact date.
These expand on questions twelve to fourteen on the full list in fourteen questions before you sign.