20/20 vision needed for home mortgages

Buyers must learn how to turn a mortgage to their advantage and not let it drag them down

Much is written about the mortgage market in Vietnam and it is generally said to be small in comparison to other ASEAN and developed nations.

Other countries have developed many mortgage options and offer the property speculator the ability to increase their property portfolios or the home owner the ability to buy rather than rent. Mortgages also allow new buyers into the market quicker as a smaller deposit is required as the mortgage makes up the balance of the purchase price, this can enable young buyers to hedge against future price increases. Long-term property owners use the equity they have to acquire more real estate and this is most evident in Vietnam today.

There appears to be many owners who have multiple properties and the funding for such was in the past from cash input and low prices. Today as demand has increased and prices, mortgages are playing a role to allow people to enter the market or increase their personal wealth.

The Global Financial Crisis (GFC) was said to be a result in part of bad lending practices and banks in some countries offered more than was is said to be prudent lending arrangements. In fact they were said to be irresponsible. Risk is best dealt with several ways and lessons of the GFC are many but prudent lending must be the first of those lessons.

There are many ways to manage risk particularly if you are a new home buyer. You can firstly buy within your means, start small, that’s where an affordable apartment is a good option and then trade up from there. Always consider that you may have only one income during the time children come along so be prepared and budget for this.

The experienced property buyer studies the market and looks at buying low and selling high. They never use 100 per cent of the equity and leave some flexibility if the market does turn the other way or the gains are not achieved as estimated. Always calculate the worst case, not the best case.

Banks apply a term L-T-V (Loan to Value Ratio) which is the maximum amount they will lend on the value of the property. Generally, 70 per cent or less at this time and that protects all parties.

It should be noted that many countries that offered 100 per cent loans are now showing large default rates as people were over committed and strong budgeting was replaced by consumption as households had all the modern appliances but they were all on loan. Look at the United States, Australia and England as recent examples. The United States has most likely suffered the worst of the crises with many homes now sold at a fraction of their value.

While touching on the topic of value this was another risk issue that emerged out of the GFC. Many companies and property owners had unrealistic views of the value of the asset. The value was over-inflated the market fell behind and before they knew it the loan was in negative equity. That is the value of the property was less than the loan.

The mistake that many people make when selecting real estate as the investment option is that they forget it’s for the long term. If you’re not in it for more than five years then perhaps re-think your approach or if you are a hardened property investor who in it in for the short term and has done all the necessary homework then proceed.

Property in Vietnam could be described more as a hobby than as a business and perhaps that is a good lesson for all to note, treat your investments with respect and do all your due diligence first. Research is a key role in sound property investment and success. How many times have I seen errors made through lack of property research and market knowledge.

Valuations are a part of the mortgage process and there is actually an international valuation standard that the mortgage industry is encouraged to apply. Many banks in Vietnam now apply these standards. Personally, I have always applied this standard and work with many banks to provide professional reports to comply with the international requirements. This in the valuation field appears to be the growing trend so people seeking valuations are getting better reporting standards.

Investors are strongly encouraged to get a check valuation so if you are not sure what to do, you can be reassured via an independent third party that the investment has some credibility. Property purchasers large or small can get an independent valuation to just make sure that you are buying at a fair price. Words of advice when using a valuation company ask if the bank you intend to use has the valuation firm as a preferred valuer and use them or you may pay more fees for a second valuation for the loan, banks don’t accept all valuers, therefore saves you costs.

After 25 years in real estate and being an investor myself, it is recommended that when you use a mortgage as an option to buy you make sure the loan fits your circumstances. That the repayments do not over commit you and that you have researched the market and made a well informed decision. I would always spend many weeks in a location, before I bought and made a detailed analysis of prices both current and historical data to make informed decisions.

Mortgage products vary and can be obtained for new purchases and for new construction local and foreign banks have many products available to make home ownership available to more people. The current trend sees young professionals buying their own home and smart investors buying more real estate which is not just centered on the city precincts.

Investors use equity and as a reminder, use equity wisely and remain in a positive position, if it is too risky or you are unsure seek professional advise. There are many companies that offer this expertise.

Let’s not limit the market to locals as there is a growing trend by expats to buy in Vietnam and while it is said to be a challenge most banks offer solutions and ANZ, HSBC and other foreign banks have experts that can help with loan solutions. Again expats are advised to make sure that the loan is suitable. Also it may be more economical to raise funds offshore or in a foreign currency. The expat buyer must remember that the tenure of the property is leasehold and may be an issue to offshore lenders who are not understanding of the system of property ownership in Vietnam.

While statistics on the mortgage market are still not reliable some numbers stated in various media reports all conclude that the mortgage market is small in Vietnam. An ADB report of 2006 stated that Techcombank had about 4,500 mortgages at an average of $26,000 each and that the portfolio was under five years of age. The loan to value ratio was about 70 per cent. The number of loans at that time is certainly small when compared to other countries and for a bank of this size. These numbers have certainly changed today and have of course increased.

Loans on offer in the market depend on the property type. ANZ offer both home equity and home construction loans of periods of five to 20 years and the L-T-V varies depending on the security but must be valued by a professional valuer. HSBC web site offers loans up to 25 years and 70 per cent of purchased house value. Banks such as Techcombank require 30 per cent seed capital and have loan terms from 1-25 years. Vietcombank offer loans for house or land purchase and require a loan application form and various security can be offered including papers of high liquidity and land use rights. Interest rates vary with some local banks offering from 10 up to 15 per cent for various purposes. Loans for non-production are said to be as high as 15-19 per cent.

The future mortgage market looks active and can be a good vehicle to buy or invest when used correctly. Some media reports recently stated that while inflation is kept at stable interest rate levels in 2011 may soften, this is yet to be see so be cautious when borrowing funds and always calculate the worst case. A very old, wise and very rich property developer taught me this rule many years ago.