Refinancing a Vietnamese home loan: when the maths works
Refinancing is sold as a way to get back to a promotional rate. It can be, and there is a cohort of borrowers for whom it is clearly worth doing. But leaving a loan is not free, and the cost of leaving falls sharply with time while the benefit of leaving does not. The whole question is one break-even calculation.
What it costs to leave
Three separate charges, from two different clauses, plus the cost of arranging the new loan. On the 2.4 billion dong loan used throughout this site:
| Leaving in | Balance | Early repayment fee | Clawback | Cost of leaving |
|---|---|---|---|---|
| Month 24 | 2,160,000,000 | 43,200,000 | 107,870,000 | 151,070,000 |
| Month 36 | 2,040,000,000 | 30,600,000 | 107,870,000 | 138,470,000 |
| Month 37, window closed | 2,030,000,000 | 20,300,000 | nil | 20,300,000 |
| Month 60 | 1,800,000,000 | 9,000,000 | nil | 9,000,000 |
The single most important row is the third. On a thirty-six month clawback window, the cost of leaving falls by 107,870,000 dong the day the window closes. Nothing else in a refinancing decision comes close to that in size, and it is entirely predictable, which means it can be waited for.
On top of the cost of leaving, the new bank will charge a fresh valuation, notarisation and registration of the new mortgage, and possibly an arrangement fee: allow 15,000,000 to 25,000,000 dong, plus whatever insurance is attached to the new promotional rate.
What it saves
Suppose in month 37 the existing loan is floating at 11.5% and a competitor offers 7.5% for twelve months, then their own base plus a 3.2 point margin. The gain has two parts and they pull in different directions.
- The promotional year. A four point saving on roughly 1,975,000,000 dong of average balance for twelve months, which is about 79,000,000 dong.
- The margin, afterwards. If the new margin is 0.3 points lower than the old one and the base rates are the same, that is worth roughly 0.3% of the average outstanding balance each year, so about 5,600,000 dong in the first year, falling as the balance does. Over the remaining sixteen years, about 46,000,000 dong.
Against a cost of leaving of 20,300,000 dong plus, say, 20,000,000 dong of new loan costs, so 40,300,000 dong, the promotional year alone pays for the move with about 38,700,000 dong to spare. In month 36 instead of month 37 the same move costs 158,470,000 dong and loses money heavily.
The break-even rule
Refinancing pays when the total cost of leaving and arriving is less than the saving over the new promotional period alone. Anything the new margin saves afterwards is a bonus, not a justification, because you do not control it.
The reason for insisting on that stricter test is that the new loan is the old loan again. Its promotion also ends, its margin is also added to a base rate the new bank sets, and its own clawback window starts on day one. A borrower who refinances every two years to chase promotional rates pays three sets of arrangement costs and three sets of exit costs for the privilege, and is permanently inside someone’s clawback window, which means permanently unable to leave cheaply.
Five things to settle before you start
- Your exact clawback window, in months from first disbursement, and the date it closes. This is the single number that determines timing. Ask for it in writing from your existing bank.
- Whether your existing bank will waive the exit charges for an internal refinance. Many will, particularly if presented with a competitor’s written offer. An internal move that avoids the clawback entirely is often better than an external one that does not.
- The new margin, as a number, not the new promotional rate. You are buying nineteen years of margin and one year of promotion.
- Whether the new loan requires insurance to get the advertised rate. A 6% single premium on a 2 billion dong balance is 120,000,000 dong and destroys the entire case on its own.
- Whether your property needs revaluation and what happens if it values lower than expected. A loan to value that has crept above the new bank’s threshold means a smaller loan and cash needed to bridge the difference.
When not to refinance
- Inside the clawback window, unless the saving is very large or the existing bank waives it.
- In the last five or six years of the term. The outstanding balance is small, so a rate saving is small in dong, and fixed costs of 20,000,000 dong or more do not amortise.
- When the new term is longer than the remaining term. Refinancing seventeen remaining years into a new twenty year loan reduces the monthly payment and increases the total cost, which is a legitimate choice for cash flow reasons but should never be mistaken for a saving.
- When your income or employment has changed for the worse since the original approval. A declined application costs the valuation fee and leaves a record.
How to run it properly
Build two scenarios in the loan inspector and compare the effective rates.
- Staying. The existing loan, with the current floating rate, held to term.
- Moving. A new loan whose principal is the outstanding balance plus the cost of leaving plus the new arrangement costs, over the remaining term, with the new promotional rate, promotional period and margin.
Rolling the exit costs into the new principal is the honest way to model it, because it is usually what happens in practice, and it stops the comparison from quietly ignoring them. If the effective rate on the second scenario is not clearly lower than on the first, the move is not worth the paperwork.