Financing a house works differently in every country I’ve lived in. Growing up in one country, it is easy to think that — however they do things — that’s just how it is done everywhere.
I grew up in America where things like a 20% down payment, a 30-year loan, and a fixed interest rate are the standard.
Things work a little bit differently in Vietnam. Let’s take the mortgage loans offered by VIB bank as an example.
- 20% is the minimum you can put down. They prefer 30%.
- The maximum length is 25 years.
- Interest and principal are repaid separately. Interest is paid every month. You can choose to pay down the principal every month, every quarter, or every six months.
- The interest rate on your loan is not fixed; it can change every 3 months.
- The current interest rate on a mortgage is 11.49%.
- There is an early repayment fee.
A lot of Vietnamese don’t borrow money from the bank. No doubt, those kind of interest rates are part of the reason why. I know someone who just borrowed money from family — a bit from an uncle here, a bit from an aunt there. He paid it off after four or five years. No one wants to owe their uncle money for three decades.
In The Value of Debt they talk about borrowing against your portfolio in order to finance a home purchase. Right now Interactive Brokers offer margin loans with a 2.41% interest on the first $100,000. And the rates go down from there. If you borrow $200,000 then the rate is only 2.16%.
Let’s say I found a very nice home for $100,000 here in Saigon. In order to get a mortgage from a Vietnamese bank I would need to put down at least $20,000 and finance the remaining $80,000. Let’s say I choose a 10-year loan. That makes my monthly payments $1,124 and I’ll end up paying $54,916 interest on that $80,000 loan.
If I use a margin loan from Interactive Brokers I could finance the entire $100,000. The monthly payments would be $938. I would pay $12,633 in interest on the $100,000 loan.
- Save over $42,000 in total interest over the life of the loan.
- No need for a down payment (i.e. no need to sell any other assets, incur capital gains, and so on)
- Better monthly cashflow: 16% ($186) less per month
I had been considering buying a house sometime this year or next. A loan based on my portfolio is looking like a pretty good option….!
A reader sent me a link to a series of posts from the blog FIRE v London about someone who used a margin loan from Interactive Brokers to pay for (part of) his new house in London: https://firevlondon.com/2015/12/14/housing-pt2-how-not-to-buy-a-house-in-london/
So it isn’t a totally unknown idea. And — thanks to lower prices here compared to London — I’d be talking about a lot less money that he was…which would put me far, far under any margin thresholds.
