Should I borrow $41,000 to buy a second house?

January 5, 2024 | 04:00 pm PT
Should I borrow $41,000 to buy a second house?
A bird's eye view of Hanoi in August 2023. Photo by Ngoc Thanh
With good finances, borrowing to own a residence that offers a higher quality of life is a sound decision, the expert advises.

Question from reader Bang Lang:

I am over 40 years old, married with two children and living in a two-story house with a floor area of 50 square meters on the outskirts of Hanoi. The house is quite spacious and new, but I do not really like the surrounding environment as it is somewhat noisy, and the neighbors are not very clean or friendly. Additionally, my house does not have a front or back yard, so it feels a bit lacking in privacy.

A relative of mine is in need of money and is offering to sell a house with an area of about 70 square meters, including a 16 square meter front yard, for just over VND2 billion (US$82,051). The house is located in a large and quiet alley with polite neighbors, which I really like. However, at present, our savings and money borrowed from other relatives amount to less than 50% of the price of this house. After expenses, we have about VND15-18 million left each month.

By buying this house, I plan to use it to earn a passive income when I get older or pass it down to my children. If I rent it out immediately after buying, the house could bring in about VND3 million per month. If we move there, our current house could be rented out for VND5-6 million. However, the new house would need some renovation to add another bedroom.

Another issue is that the relative is also building a small house on the same land plot to live in after selling the current house. So at the moment, the land cannot be divided into two plots with separate title deeds yet and only a written agreement can be made.

This person also told me that if I do not have enough money to buy it now, I can pay a part upfront and the rest, which will incur interest as per bank rates, can be paid gradually as they do not need all the money immediately.

Should I borrow more than VND1 billion to buy this house or wait until my financial situation is better? Thank you very much for your advice.

Advice from Nguyen Thu Giang, Personal Finance Planner, FIDT Investment Consulting and Asset Management Joint Stock Company:

Firstly, thank you for providing detailed information about your current house, the house you are considering purchasing, and your family's financial situation. This information will help me offer specific and clear advice.

It appears from your description that you are quite fond of the second house. When faced with financial decisions, our aim is not only to achieve financial goals but also life goals, with quality of life being a crucial criterion for everyone. Therefore, in a favorable financial situation, I support borrowing to acquire the house sooner.

In the following part, we will analyze whether your current financial condition is favorable for taking out a loan of over VND1 billion and, if you decide to borrow, what you need to do to manage the risks associated with this debt. Legal aspects are also important to consider.

Let's first review the key information: the house is valued at over VND2 billion, your savings and borrowed funds amount to less than 50% of this price, and additional bedroom renovations are needed. You have considered borrowing over VND1 billion, but it is not clear whether the renovation costs are included in this figure, so I will assume the total borrowed amount could reach VND1.2 billion.

After monthly expenses, your family has around VND15-18 million left. If you move into the new house, you could rent out your current house for VND5-6 million. Thus, the average monthly surplus would be about VND22 million.

If your household spending remains unchanged, a monthly loan repayment of about VND17.5 million would be reasonable and not too overwhelming. You could use the remaining funds for savings or investment.

You mentioned that if you do not have enough money now, the owner agrees to a partial upfront payment, with the rest paid gradually, and interest calculated as per bank rates. It is unclear whether this interest is based on the bank's savings or lending rate.

If it is based on the savings rate, that's excellent, as these rates are very low. However, even if it is based on the bank's lending rate, these rates are currently at a 10-year low.

Assuming an average interest rate of 7.5% from major banks like Vietcombank and BIDV, if you borrow VND1.2 billion and repay VND17.5 million per month, it would take 7.5 years to pay off this debt.

In return, you will significantly improve your quality of life by living in a space you love and owning a property that will appreciate at least enough to offset inflation, not to mention the immediate rental income of VND3 million per month even before the house is renovated.

At over 40 years old, you could pay off this debt before turning 50. Even at 50, banks are still willing to lend to customers in good financial standing.

Assuming your current house, which can be rented for VND5-6 million per month, is valued at about double the price of the second house at around VND4 billion. With the VND1 billion already available, your debt-to-asset ratio would be about 1:6, a relatively safe level for your age.

Next, let's talk about risk management. This is something that should be considered and prepared for before deciding to take on debt, not when unexpected situations arise.

Insurance and an emergency fund are essential for everyone, but they become even more important when you have debts. If you already have insurance, you should consider adding life insurance or at least loan insurance with coverage equal to the borrowing amount. This is to ensure that in case of income loss and inability to repay the debt, it does not affect your family's essential living expenses.

Regarding the emergency fund, with insurance and no debt, it should cover a minimum of three months of household expenses. But with debt, it should cover three months of expenses and debt repayment.

You also need to plan for potential income reductions or interest rate increases that could make loan repayment more difficult. I suggest four solutions when you find it hard to repay debt, in order of decreasing priority: use your emergency fund, seek support from relatives, consider restructuring the debt and personal finances, and finally, consider selling assets to settle the debt.

If you buy the second house, it is important to note that nearly 100% of your assets would be in real estate. This is not an ideal allocation as it lacks diversity and liquidity.

Additionally, this asset portfolio increases risk because if you need cash for any reason, such as health issues or other expenses, before the debt is repaid, you will not have highly liquid assets available. That is why I suggest adding health insurance.

Also, you should only allocate a maximum of 80% of your monthly surplus to debt repayment. The remaining VND4-5 million should be kept in highly liquid assets like bank deposits, gold, or fund certificates.

Another important consideration is that currently, the house deal can only be documented through a written agreement, which only records the transaction between individuals and does not fully guarantee your legal ownership of the house. Therefore, if you view this as an investment asset, you will not be able to sell it until you have the land use right certificate and have property on the land.

Finally, all personal financial plans need to be flexible and adjusted over time, depending on changes in your family or the socio-economic environment. When necessary, you should seek out expert financial advice. I wish you success in achieving your financial and life goals.

*The question and answer were translated into English by AI.

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