Declining balance vs annuity: which fits your cash flow

When you sign a home loan in Vietnam, the bank asks how you want to repay. Two methods are common: declining balance (dư nợ giảm dần) and annuity, or equal installments (trả góp đều). With the same loan and the same rate, they give different monthly payments and different total interest.

Readers from markets where every mortgage is an annuity may not have seen declining balance before. In Vietnam it is a standard option.

Declining balance

Each month you repay an equal slice of principal, plus interest on the balance still owed. On a 1.2 billion VND loan over 20 years, the principal slice is 5 million VND a month. The first month’s interest is charged on the full 1.2 billion, the next month’s on 1,195 million, and so on down.

So the first month is your largest payment, and each payment after it is a little smaller.

Annuity

The payment is the same every month for as long as the rate does not change. In the early years most of it is interest; later, principal takes the larger share.

When the floating rate changes, the bank works out a new equal payment for the months that remain.

How they compare

• First month: declining balance asks for more than an annuity.
• Total interest: declining balance costs less, because principal is paid down faster in the early years.
• Budgeting: an annuity is easier to plan around, because the payment stays put while the rate does.

Which one to choose

If your income covers the first payment of a declining-balance loan comfortably, it saves you interest. If money is tight, or you want one fixed figure to budget with, an annuity is lighter in the early years.

The mortgage calculator works out both. Enter your loan, switch between the two methods, and compare the first month, the first month after the promotion, and total interest.