Are We Mortgaging Our Future in Acquiring Property?

By Christopher Lim, RFP ®

Owning a property is one of the biggest indicators of how successful a person is in our society. This is one of the major reasons the property sector has benefited largely from overseas workers and the growing middle class who see real estate as an investment. Eventually, they would like to see their family lifestyle improve and one way is by owning their own home instead of continuously renting apartments or living with relatives.

Since owning a home is also one of the biggest financial responsibilities of a family, we need to perform proper due diligence before taking the plunge. In purchasing homes, the cheapest way is via full cash payment because price can be negotiated and more discounts can potentially be availed. In reality, only a small percentage can buy properties as such. Majority get to own homes through financing. So, where can you get the best financing such as payment terms, interest rate, and loan paying period?

Before we go further, here are a few basic terminologies that will be tackled in the succeeding paragraphs:

• Real estate appraisal – The process of determining the valuation of a real estate property.
• Property equity – The valuation of ownership in real estate property which is the difference between the market value of the property and the remaining balance of a home,
• Loanable amount – The maximum debt the financial institute is willing to lend.
• Mortgage – This is a loan that is secured by real estate property with interest rate and payment duration.
• Fixed rate mortgage – In this type of mortgage, interest rate remains the same throughout the loan duration.
• Adjustable rate mortgage – In this type of mortgage, interest rate is only fixed for a period of time and will change (which could go up or down) depending on where the financial industry is heading at that time.

Some of the frequently asked questions of would be homeowners are:

How do I get qualified for a loan?

To qualify for a loan, you need to demonstrate capacity to pay the loan. The rule of thumb is maximum monthly amortization cannot exceed 40% of your net household income. Yes, this is the total income of both spouses less all applicable taxes and deductions/obligations. To illustrate, if your gross monthly household income is P100,000 and expenses is P30,000, your net household income is P70,000. Multiplying P70,000 by 40% will result to P28,000 and this represents the maximum allowable monthly amortization.

How to get the best appraisal?

Similar to a vehicle, the better the property condition, the higher the appraisal you will receive. Obviously, property location and surroundings have major impact on valuation.

What is the advantage of property appraisal?

With real estate appraisal, you would get an idea if you are paying too much for the property or if it is a good buy. Financial institutions can perform this and typically charge about P3,000 to P4,000 per property. Please remember that validation of real estate title authenticity is not part of appraisal.

What is the loanable amount upon appraisal? Can I loan the whole appraised amount?

The lender will only loan a percentage of the appraised amount. Mostly, the percentages are:

• Vacant lot – 60% of real estate appraisal
• Condominium / House and lot / Townhouse – 70% of real estate appraisal
• The remaining percentage will serve as property equity of the buyer.

Where can I get financing?

Your best bet is to avail through PAG-IBIG or bank collateral financing. There are also non-collateral financing available but interest rates are very high.

How to save on interest?

• Adjustable Rate Mortgage (ARM) has lower initial interest rate than Fixed Rate Mortgage (FRM) because interest rate risk is transferred from lender to buyer/borrower. Hence, initial interest rate may be lower by several percentage points than the average 20-year fixed rate. Please be warned, although ARM may be cheaper initially, interest rates may potentially go up when it is time to renew the loan, which in effect will cause an increase on the monthly amortization. If you are not a risk taker, FRM is the way to go. To further illustrate, in 2011, some local banks were giving as low as 6.7% interest. Now in 2012, local banks are quoting 7.7% interest, which represents an increase of 1% in a span of one year.
• Another way to save on interest is to shoulder a bigger equity. In effect, the mortgage will be smaller and can be paid in a shorter time frame, thereby saving on interest as well.

Am I qualified for PAG-IBIG housing loan?

To avail of Pag-IBIG housing loan, a member must satisfy these requirements:

• You must be a Pag-IBIG member for at least 24 months
• You must be younger than 65 years old at loan application and is insurable
• You must be younger than 70 years old at maturity of loan
• You must not have outstanding Pag-IBIG housing loan
• All Pag-IBIG housing mortgages are fully paid
• No arrears on multi-purpose loan

How do I get the best rate?

• Shop around. In order to close the transaction with the buyer/borrower, some financial institutions are willing to price match other financial institutions’ lower rate. All you have to do is ask.
• Pricing varies depending on the financial institution. This year 2012, these are the range of rates gathered from several financial institutions:
• Fixed for 1 year from 7.5% to 8.75%
• Fixed for 2 years from 7.5% to 9.25%
• Fixed for 3 years from 7.5% to 9.50%
• Fixed for 5 years from 8% to 9.75%
• Fixed for 6-15 years from 10% to 11.5%
• Fixed for 16-25 years from 11.50% to 12.5%

For loan application?

This can be obtained from the bank where you will apply for housing loan. The typical requirements are as follows:

For employed

• Certificate of Employment and Income
• Crew Contract and Employment History (for seaman)
• Contract / Certificate of Employment (COE) authenticated by Philippine Consulate (for nurse and contract workers)
• Income Tax Return (ITR)
• Pay slips

For self-employed

• DTI business registration
• Articles of incorporation and by-laws with SEC registration certificate
• Audited financial statements
• Income Tax Return (ITR)

Real estate collateral documents

• Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT)
• Master deed of declaration (for condominium)
• Lot/Vicinity map
• Tax declaration
• Tax clearance
• Tax receipts

What are the interest rates of Pag-IBIG housing loan?

• Interest rates vary depending on loan amount. Pag-IBIG loans over P1,000,000 are comparable to bank financing rates.
• Loan amount up to P400,000 – 6% interest
• Over P400,000 to P750,000 – 7% interest
• Over P750,000 to P1,000,000 – 8.5% interest
• Over P1,000,000 to P1,250,000 – 9.5% interest
• Over P1,250,000 to P2,000,000 – 10.5% interest
• Over P2,000,000 to P3,000,000 – 11.5% interest
• Pag-IBIG is an interesting option. If you will acquire properties that cost less than P1,000,000, it may be worth your effort because of the lower interest rate. Please take into consideration that loan processing takes longer compared to banks, which typically is completed within a week or two.

Purchasing a property is one of the biggest decisions you will make in your lifetime. Taking into account these steps can make your experience more memorable and fun.

• Shop around
• Negotiate
• Pay a bigger home equity
• Shorten the paying terms
• Use Fixed Rate Mortgage

Christopher Lim is affiliated with International Marketing Group. He is a Certified Financial Consultant (CFC), Certified Investor Solicitor (CIS), Certified Real Estate Broker (CRB), Chartered Wealth Manager (CWM), and Registered Financial Planner (RFP). He is also a Personal Finance Coach, Investment Adviser, and Resource Speaker. For an introduction to personal finance or investments, you can contact him through his mobile +63 917-840-9332 or email limchrc@yahoo.com. His other articles can be found on //pinoyfiq.com. To learn more about the RFP program, visit www.rfp.ph or inquire at info@rfp.ph or call 634-2204.