How to avoid drowning in real estate debt with average income?

How to avoid drowning in real estate debt with average income?

While buying a home is quite easy for high-income households, it is another story for the middle-class. With a wise and specific financial plan, chances of owning a home still lie within reach even with an average income
10:00, 30/10/2019

For home buyers, especially those of millennium generation, the toughest issue is how to balance financially. Trying to buy a house with too little amount of money, without careful calculation for monthly debt, or counting the chickens when they’re not hatched makes people become miserable because of debt.

Speaking at “Having appointment with real estate experts #5” talkshow, Mr. Trinh Nguyen Tuan Anh, Executive Committee of Vietnam Real Estate Brokers Association, Founder - Chairman of King Broker Joint Stock Company, gave some useful advice for home buyers on when to acquire a mortgage, how much money should be spent each month on total income to pay off the debt and which bank to borrow.

Before borrowing from a bank or a friend/relative, a homebuyer must have a sufficiently large amount of accumulated money as well as a detailed financial plan to become a "smart debtor". And in order not to be “debt-flooded" or live in difficulties without any dime to spend, those with high monthly income should prepare an accumulated capital equals to about 30% of the value of the house and borrow remaining 70% from banks.

Meanwhile, people with average monthly income will need to accumulate a higher amount, about 40-60% of the value of the house. Then, the amount of bank loans will be reduced and monthly debt is still within the borrower's ability to pay.

According to the expert, when balancing finance for the home loan, buyers also need to carefully calculate the amount of money to pay bank monthly to avoid being overdue, which will result to penalties or being listed as bad debt.

The formula for calculating the debt payment is monthly amount to pay the bank equals the sum of principal and interest, which are:

Principal = Total amount of debt / Loan period

Interest = Monthly interest * Outstanding debt

The money spent on monthly payments should be at a reasonable level compared to total income. According to Mr Tuan Anh, for families without children, the cost of living usually accounts for about 40% of total income, therefore the money for bank payment should not exceed 60% of total income. Meanwhile, families with young children have a higher cost of living, which usually equals to about 60% of total income, so the debt repayment should not surpass 40%. For example, if the monthly income is VND20 million, the amount paid to the bank should not be larger than VND8 million.

Mr Tuan Anh also instructed homebuyers on 2 ways of calculating the total income to balance monthly payments and financial planning.

The first way is to calculate with the month with the lowest income in the year.

The second method is to calculate with the average of highest and lowest monthly income in the year.

When doing the calculation, in either way, the home buyer will ensure a safe level for the loan. Homebuyers should avoid calculating the monthly payment based on the highest monthly income.


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