How home loan interest is calculated: how the reducing balance differs from the original principal

The calculations below are common formulas and the figures are illustrative examples, not any bank's rate schedule. Updated 24 October 2026.

Two loans that both say "10% per year" can differ by billions of VND in interest, purely because of how it is calculated. This section helps you check the repayment schedule the bank sends you before you sign the credit contract.

1. Two common ways of calculating interest

Reducing balance: interest each period is charged on the remaining principal. The more principal you repay, the lower the interest in later months. According to guidance articles, this is the common method at commercial banks.

Original principal (flat rate): interest each period is charged on the entire amount borrowed at the start, and does not fall even as you repay principal. This is more often seen in instalment consumer loans.

Reducing-balance formula with equal principal payments: monthly principal = loan amount ÷ number of months; month-one interest = loan amount × monthly rate; later months' interest = remaining balance × monthly rate. Monthly rate = annual rate ÷ 12.

2. Example: a 2 billion VND loan, 20 years, 10% per year

The monthly rate is about 0.833%. Principal each month is 8.33 million VND (2 billion ÷ 240 months).

Method	Month 1	Month 120	Total interest over 20 years
Reducing balance, equal principal	25.0 million (principal 8.33 + interest 16.67)	16.7 million	about 2.01 billion
Reducing balance, equal principal and interest (annuity)	19.3 million per month	19.3 million	about 2.63 billion
Interest on the original principal	25.0 million per month	25.0 million	4.0 billion

How month 120 of the first row is calculated: the remaining balance is about 1.01 billion, interest 8.4 million, plus principal 8.33 million gives about 16.7 million.

Two takeaways. One, the "equal principal and interest" schedule is lighter in the early years but has higher total interest than equal principal because principal falls more slowly. Two, interest on the original principal at the same 10% doubles the total interest, so a rate advertised this way can only be compared once converted to a reducing balance.

3. Promotional and floating rates

The rate in the contract usually has two phases: a fixed promotional rate, typically 12–36 months depending on the bank, then a floating rate equal to a base rate plus a margin. Thời báo Tài chính Việt Nam (27 July 2026) reported that many banks apply 10% per year or more even during the promotional period, and that one bank uses a reference rate of 9.3% per year plus a margin of 3–7% after the promotional period. The example above keeps a 10% rate for all 20 years only for ease of comparison; in practice you should also calculate a rising-rate scenario.

Scenario example: for the same 2 billion VND over 20 years, if the rate rises to 12% per year after the promotional period, the equal principal and interest payment rises from about 19.3 million to about 22.0 million a month (calculated on the whole loan, only to show the sensitivity).

4. Five questions to ask the bank

1. Is interest charged on the reducing balance or on the original principal?
2. Repayment: equal principal, or equal principal and interest? Is there a principal grace period, and how long?
3. How many months is the promotional rate, and after that what is the base rate and what is the margin?
4. Is there a clause allowing the bank to adjust the rate during the fixed period?
5. How are early repayment fees and other fees (insurance, appraisal) calculated? See Early repayment: how penalty fees are calculated.

Ask for the month-by-month repayment schedule in writing and check it against the formula above: month-one interest must equal the loan amount × monthly rate.

5. How much to borrow to stay within your means

The monthly payment should stay within a range you can bear even if rates rise. A Batdongsan.com.vn survey says home buyers expect instalments to take about 20–40% of income. Step-by-step checks are in Safe bank-loan leverage and Managing your finances before buying a home.

6. Common mistakes when comparing rates

1. Comparing promotional rates and ignoring the rate after the promotional period. A 12-month promotional package is a few points lower, but the floating rate afterwards may be higher than on a package with a longer promotion; calculate total interest over the whole loan term under both scenarios.
2. Looking at the month-one payment and forgetting total interest. A lighter payment usually comes with higher total interest, like the "equal principal and interest" row in the table above.
3. Not asking about period rounding and the interest day-count. Some banks charge interest on the actual number of days in the month, others on a 30-day month; the difference is small each period but accumulates over many years.
4. Forgetting accompanying fees. Appraisal fees, loan insurance and early repayment fees all raise the real cost; see Home loan insurance.

A quick way to check yourself: take the opening balance times the annual rate divided by 12; the result must match the interest the bank shows for that period. If it differs significantly, ask again how it is calculated before signing.

• Batdongsan.com.vn (wiki) — How to calculate instalment interest on a home purchase (reducing-balance and original-balance formulas; updated 19 May 2025), accessed 24 October 2026.
• Thời báo Tài chính Việt Nam — Home loan rates "anchored" at double digits, hopes of cooling are not easy (promotional rates, post-promotion margin, repayment ratio of 20–40% of income), 27 July 2026.