The thirteenth month: what happens when the promotional rate ends
Almost every home loan advertised in Vietnam leads with one number, and that number is valid for somewhere between six and thirty-six months. What replaces it afterwards is set by a formula, not by the marketing department, and the formula is printed in the contract. The gap between the two is where most of the money is.
One loan, two prices
Take a loan that is close to the middle of the market: 2.4 billion dong borrowed against a 3.5 billion dong property, over twenty years, on equal principal with interest on the reducing balance. The promotional rate is 6.9% a year for the first twelve months. After that it floats at the bank’s base rate of 8.5% plus a margin of three percentage points, so 11.5%.
Under equal principal the capital repayment is fixed for the whole term: 2,400,000,000 divided by 240, which is 10,000,000 dong a month. Only the interest moves. In month twelve the balance opening the month is 2,290,000,000 dong and the monthly rate is 6.9 divided by twelve, which is 0.575%. The interest is 13,167,500 dong and the instalment is 23,167,500 dong.
In month thirteen the balance has fallen by another 10,000,000 dong, to 2,280,000,000. But the monthly rate is now 11.5 divided by twelve, which is 0.9583%. The interest is 21,850,000 dong and the instalment is 31,850,000 dong.
| Month | Rate | Interest | Principal | Instalment |
|---|---|---|---|---|
| 1 | 6.9% | 13,800,000 | 10,000,000 | 23,800,000 |
| 12 | 6.9% | 13,167,500 | 10,000,000 | 23,167,500 |
| 13 | 11.5% | 21,850,000 | 10,000,000 | 31,850,000 |
| 24 | 11.5% | 20,795,833 | 10,000,000 | 30,795,833 |
| 60 | 11.5% | 17,345,833 | 10,000,000 | 27,345,833 |
The instalment rises by 8,682,500 dong between two consecutive months, which is 37.5%. The household did nothing, missed nothing and was not late. A date passed.
Why 37.5% and not 67%
The rate itself goes up by 67%, from 6.9 to 11.5. The instalment goes up by less because principal is half of it and principal does not change. That is a genuine cushion, and it is also the reason the shock is far worse on some structures than on others.
On equal instalments the bank recomputes the annuity at the new rate, over the remaining 228 months, from the remaining balance. The same loan starts at 18,463,387 dong a month and moves to 25,324,671 dong in month thirteen, a rise of 37.2%. Almost identical in percentage terms, much smaller in dong, and far more expensive over the term: total interest of 3,595,585,609 dong against 2,663,630,000 dong on equal principal, because the balance is paid down so much more slowly in the early years.
On flat interest, where interest is charged on the original 2.4 billion for the whole term regardless of what has been repaid, the instalment goes from 23,800,000 to 33,000,000 dong and total interest reaches 5,409,600,000 dong. Flat interest is rare on home loans and common on consumer and car finance, and it is the single most important thing to identify on an offer sheet, because a flat 8% is not comparable to a reducing-balance 8% in any sense at all. That comparison is worked through in equal principal or equal instalments.
The three things that make the thirteenth month worse than it needs to be
A grace period that ends on the same date
If the loan also carried twelve months of interest-only, the first twelve instalments are just the interest, starting at 13,800,000 dong. Month thirteen then has to absorb the rate reset and the start of capital repayment at the same time, and because the capital is now spread over 228 months rather than 240, it is repaid faster. The instalment goes from 13,800,000 to 33,526,316 dong. That is a rise of 142.9%, and it is the version of this problem that actually causes defaults. See the grace period and the cliff at the end of it.
A base rate that has moved since the offer
The 11.5% above assumes the base rate is the same in month thirteen as it was on the day of signing. There is no reason it should be. The base rate is published by the bank and reset at intervals set out in the contract, typically every three or six months. The margin is fixed; the base is not. Running the same loan with the floating rate two percentage points higher, at 13.5%, takes the month thirteen instalment to 35,650,000 dong, a rise of 53.9% from month twelve, and total interest to 3,098,730,000 dong.
A reset date that is not the anniversary
Read the clause carefully. Some contracts define the promotional period in months from first drawdown, some from the date of the credit agreement, and some to the end of the calendar quarter in which the twelfth month falls. On a loan drawn down in tranches, which is normal when buying off-plan, the promotional clock may start on the first tranche while the balance it applies to is still small. The promotional saving is then far less than the headline suggests.
Why the bank’s own calculator does not show you this
Loan calculators on bank websites take one rate and apply it across the whole term. They are not being dishonest; they are answering a simpler question than the one the borrower has. The output is arithmetically correct and practically useless, because no home loan in this market has one rate.
There is a second reason. Nobody can tell you what the base rate will be in month thirteen, so a bank that published a forecast would be making a commitment it cannot keep. The honest answer is not a forecast but a range, and a range is harder to put on a landing page than 6.9%.
What to do with this before you sign
- Get the margin in writing, as a number. The margin is the part of the floating rate the bank commits to. If the offer sheet says the floating rate is “the base rate plus a margin determined by the bank”, the loan has no ceiling of any kind.
- Get the base rate’s definition, not just its current value. Ask which published rate it is, where it can be looked up, and how often it resets. A base rate defined as “the bank’s cost of funds for twelve month deposits plus adjustments” is a base rate the bank can move on its own.
- Budget on the floating instalment, never the promotional one. The promotional payment tells you nothing about whether the loan is affordable. The number that matters is the instalment in month thirteen, and it should be tested two percentage points above the current floating rate.
- Check what else lands in the same month. The grace period ending, an insurance renewal and a management fee starting all tend to cluster around the first anniversary.
The number that actually compares two offers
Two banks offering 6.9% and 7.4% cannot be ranked from those two numbers. The one at 6.9% might have a twelve month promotion and a 3.5 point margin; the one at 7.4% might have twenty-four months and a 2.8 point margin, and over twenty years the second is considerably cheaper. The only way to rank them is to price the whole term as one rate. For the loan in this article that number is 11.392% a year, against a headline of 6.9%. How it is calculated, and why it is the only figure worth comparing, is the subject of the effective rate.
You can put your own offer through the same arithmetic in the loan inspector. It takes about two minutes and needs four numbers from the offer sheet.