Prepaying a home loan: shorter term or lower payment?

A prepayment cuts the balance at once. The bank then does one of two things: it keeps the monthly payment so the loan ends earlier, or it keeps the term and recalculates a lower payment. A shorter term usually saves more interest. A lower payment leaves more room in each month’s budget.

Example: prepaying 500 million VND

Take a 2 billion VND loan over 20 years as an annuity, at a promotional rate of 5.5% a year for 12 months, then 10.5% floating. Both rates are only for illustration. After month 18 you prepay 500 million VND.

Month 18 falls in the second year of the loan. At that year’s default rate of 2%, the prepayment penalty (phí phạt trả trước hạn) is 10,000,000 VND 1.

With a lower payment:

• From month 19 you pay 14,595,422 VND a month instead of 19,709,757 VND.
• The loan still ends in month 240.
• Total interest falls by 635,382,784 VND compared with no prepayment.

With a shorter term:

• You keep paying 19,709,757 VND a month.
• The loan ends in month 134, 106 months early.
• Total interest falls by 1,604,870,439 VND compared with no prepayment.

For the same prepayment, the shorter term saves close to 1 billion VND more interest in this example. In return you keep paying about 19.7 million VND a month.

Which one suits you

A shorter term suits a steady income that already carries the current payment comfortably. The money you prepaid reduces the interest of every remaining month, and you are debt-free sooner.

A lower payment suits a budget where the loan takes a large share of income, especially right after the promotion ends. You can still pay extra later when you have cash, though each extra payment may carry a penalty.

Ask the bank before you prepay

• After a prepayment, does the bank lower the payment or shorten the term? Can I choose?
• What is this year’s prepayment penalty, and is it charged on the amount prepaid or on the balance?
• Can I prepay a small amount each year without a penalty?

In the mortgage calculator, enter the month and amount of the prepayment, then pick “Shorten the term” or “Lower the monthly payment” to compare both with your own loan.