First things first
Purchasing a home is one of the most significant financial decisions most of us make in life. It’s important to know all the details before committing to a home loan, or mortgage, from the bank. Most home loan commitments last for 10 to 30 years, meaning it’s well worth your time to take some time early on in the process to know what you’re getting into before you sign the dotted line.
A home loan is money to buy a house, plain and simple. At the time of purchase, most people don’t have the full sum of money to cover the purchase. A home loan, or mortgage, lets you pay for part of the house upfront – typically 20% of the purchase price – and finance the remaining portion – typically 80% – from the bank.
The house you buy becomes the collateral for the bank loan. That means that if you stop paying your loan installments, the bank can eventually keep your house. It’s important to understand the key elements of the loan to make sure you can properly service your debt, and build your path to home ownership.
There are four key parts of a home loan that you need to know: Down payment, interest payment, payoff duration, and insurance.
Your down payment is the cash you pay upfront toward the purchase price. For example, if you are buying a home for 2,000,000 THB the bank will typically ask that you pay at least 20% of this price upfront. This means you pay 400,000 THB immediately when you sign. The remaining 1,600,000 will be paid to the seller by the bank, and you now begin the process of paying back the bank.
Most Thai banks expect you to pay home loan installments every month. The amount that you pay consists of two parts: payment toward principal (your original 1,600,000 financed from the bank) and interest payments.
Think of the interest payment as the “price” of the loan. When you borrow 1,600,000 from the bank, they won’t be satisfied with just receiving 1,600,000 back from you. They didn’t make any money, and took a risk to loan you the money! The interest rate is how the bank makes money, and interest rates change frequently.
The two home loan interest rates in Thailand are fixed rate and variable rate.
Fixed interest means the “price” of your loan, or the percent interest you pay remains the same for the entire time you have the loan. So, if you take out a fixed rate loan at 5%, you will be paying toward 5% interest for the entire period.
Variable rate means the “price” of the loan changes. Typically in Thailand, it’s based on the central bank interest rate, which means your interest can go up or down.
What happens if you get a fixed rate interest loan at 5% and Thailand’s interest rates go way up, to say 10%? You’re lucky! You’re still locked in at 5%.
What happens if you get affixed rate interest loan at 5% and Thailand’s interest rates drop to 3%? You also have options! You can use Masii.com to refinance your loan, which means another bank will pay off your 1,600,000 THB (or whatever is remaining), and open a new loan with you at a lower interest rate.
Most Thais finance their home loan over 30 years. This means that you have 30 years to pay off the 1,600,000 THB you owe to the bank. A longer time period means lower monthly payments. Imagine you loan 1,000 THB to your friend for a month: If she has to pay you back every week (with no interest, because you’re friends 🙂 she would pay 250 THB per week. Now imagine you loan 1,000 THB but give her 2 months to pay off. Every week she would owe you only 125 THB.
So why would you ever choose to pay back your loan in 10 years when you can pay it back over 30 years? Firstly the interest rates are different. Use Masii.com or consult your advisor to see what rate is the lowest. Also remember that in a 30-year home loan, you are pay interest for longer – which means the total amount you pay to the bank is much higher.
If you want a lower monthly payment, go with a 25 or 30-year mortgage. If you want to pay off quickly and are certain you can handle the payments, go for something shorter.
But don’t forget: You can always pay off your mortgage early, with no penalty! Say you take a 30-year mortgage, but 12 years into it, you have saved enough money to pay back the bank. You can pay it back! You are in control of your financial future.
When the bank lends you money, sometimes they will require you to buy mortgage insurance. This is an insurance policy that protects the bank in case you don’t pay back the bank loan. Banks often like to sell their own brand of mortgage insurance (they make more money), but remember you have a right as a consumer to shop around and find the best deal. Many banks offer mortgage insurance, and it’s up to you to find the right option. Masii.com advisors are ready to help you find the right products.