Buying a home is one of the most important investments you can ever make. It can be the most expensive, too. Property prices in the Philippines go as high as millions of pesos. Even if you can pay a lump sum of cash for your dream home, it is not a wise and practical choice.
This is why Filipinos turn to housing loans to fund their new home without breaking their budget. The Bangko Sentral ng Pilipinas even noted the steady increase in demand for housing loans over the years.
Is this your first time to buy a house in the Philippines? You have to know the different loans for financing a home. The types of housing loans in the Philippine market vary according to loan purpose, financing scheme, and interest rates.
Here is an overview of the different options available for Filipinos who want to make their dream home come true.
5 Types of Housing Loans Based on Purpose
Usually, Filipinos apply for a housing loan to purchase a home. But several other types of housing loans are available in the market to meet other home ownership-related purposes.
1. Home purchase
Banks, real estate developers, and government agencies in the Philippines provide this basic type of loan to people looking to buy a house and lot (or lot only) or a condo. With a home purchase loan, you can borrow a minimum of Php 300,000 to Php 500,000 or up to 80% of a property’s appraised value. Depending on the lender, these loans are payable in 5 to 30 years.
2. Home construction
A home construction loan is suitable for people who already own a lot and want to build a home on it based on their specifications and requirements. This housing loan type is used to fund all construction expenses such as building materials, permits, and labor.
3. Home improvement
Home improvement loans are for homeowners who need money for renovation, remodeling, and repairs of their property. These can also cover expenses for extending a part of a house and building additional rooms.
4. Home mortgage refinancing
This is the type of housing loan you take out when your existing loan no longer suits your needs. Essentially, you’re changing to a new loan with better terms. Refinancing a home loan can be a smart decision. It allows switching from a variable rate to a fixed rate and vice versa to reduce risk and reducing monthly amortizations to save money.
5. Home equity
With a home equity loan, you can borrow money against your property’s value. The funds can be used for other major expenses such as tuition, travel, business, investment, and more.
3 Types of Housing Loans Based on Financing Scheme
Filipino homebuyers have a wide range of choices when it comes to financing their dream home. Real estate developers, banks, and government agencies offer housing loans with different terms, amortizations, interest rates, and requirements.
1. In-house financing
Purchasing a house through in-house financing involves paying monthly amortizations directly to the property developer.
Pros of in-housing financing:
- Quickest and most straightforward option. No third party (bank or government) is needed for processing and funding the loan because the developer handles everything.
- Less rigid requirements and paperwork. Property developers are not as stringent as banks and government agencies when having homebuyers prove their capacity to pay. The only requirements to qualify for in-house financing are a 10% to 30% down payment and a proof of income.
- Little or no background check or credit investigation. Homebuyers with less-than-ideal credit history are less likely to be rejected.
- Discounts. If you pay in cash immediately or during the turnover of the unit, the developer may offer you a discount.
Cons of in-housing financing:
- Shorter loan terms. You only have 5 years or less to pay off your loan, which means higher monthly amortizations. This is shorter than the 20 to 30-year terms of banks and government loans.
- Limited property choices. Not all properties by a developer can be purchased through in-house financing. Most pre-selling units are available for this financing scheme, while ready-for-occupancy units are not.
- Higher interest rates. Developers charge 14% to 18% interest rates, which are higher than the 5.25% to 11% range of bank loans.
- Buyers who want to move to a new home quickly
- People who can afford the high mortgages and can pay the loan off in a short period
- People with no or poor credit history, including those with denied loan applications from banks and
- government lenders
2. Bank loans
Homebuyers can borrow at least Php 300,000 up to 80% of the property value from banks such as BDO and BPI that provide housing loans in the Philippines. Bank loans require a collateral, which is the home to be purchased.
Pros of bank loans:
- Lower interest rates. Stiff competition among banks drives the housing loan interest rates down. The bank loan rates range from 5.25% to 11%, making them lower than in-house financing and even government loan interest rates.
- Longer loan terms. You can choose to repay your housing loan for a maximum of 20 to 25 years.
- Lower monthly installments. Repaying a bank loan is easier on the budget than in-house financing because of the lower rates and longer repayment terms.
Cons of bank loans:
- Stricter requirements. To qualify for a bank loan, borrowers have to meet stringent requirements that vary based on the lender, loan purpose, type of property to be purchased, and employment status. Also, banks conduct background and credit checks to determine a loan applicant’s ability to repay a loan.
- More documents to submit. Loan applications can be tedious because you need to submit valid IDs, latest pay slips, income tax returns, Title Certificate of Transfer, and vicinity map and lot plan of the property, among many others.
- Miscellaneous fees. You may have to pay a handling fee, appraisal fee, documentary stamp tax, notarial fee, and registration fee.
- Borrowers with good credit history and a stable, high-paying job
- Homebuyers who want flexibility in terms of loan repayment period, interest rates, and monthly amortizations
3. Government loans
The Philippine government provides affordable housing loans to low-income to middle-income Filipinos who want to buy a home. The Pag-IBIG Fund and Social Security System (SSS) are the two most popular agencies for government home loans.
Pros of government loans:
- Longest loan terms. Homebuyers who want to reduce their monthly amortization can choose to repay their Pag-IBIG or SSS loan for up to 30 years.
- Lower interest rates. Government agencies charge interest rates that are comparable to those of bank loans. Pag-IBIG housing loan interest rates range from 5.5% (1-year fixed period) to 10% (30 years). Interest rates for SSS housing loans range from 8% to 11%.
- Affordable home financing. The long repayment periods and low interest rates make government loans a great choice for Filipinos with modest income.
Cons of government loans:
- Exclusive for active members. To qualify, a homebuyer who considers getting a government housing loan needs to be a Pag-IBIG or SSS member.
- Monthly contribution requirement. For Pag-IBIG housing loan, members need to have paid 24 consecutive monthly contributions. SSS housing loan requires payment of 24 consecutive or 36 non-consecutive monthly contributions.
- Pag-IBIG and SSS members who are up-to-date with their monthly contributions
- Minimum wage earners
- Overseas Filipino workers (for SSS housing loan)
- Homebuyers who are looking for low monthly amortizations
2 Types of Housing Loans Based on Interest Rate
Interest rates are among the most crucial deciding factors for people looking to get a housing loan. Interest rates charged on housing loans in the Philippines are either fixed or adjustable, each having its advantages and disadvantages. It’s a matter of choosing the type of interest rate that works better for you.
1. Fixed interest rate
A fixed interest rate on a housing loan (also called a fixed-rate mortgage) does not change and remains at the then-prevailing rate in the market over the entire loan term, regardless of interest rate movements.
Pros of a fixed interest rate:
- Easier managing of finances. Because monthly payments are fixed during the whole term, you can easily allot an accurate budget for mortgage payments.
- A strong sense of security and certainty. When the country’s economy goes through rough times, market interest rates tend to go up. Opting for a fixed rate gives you peace of mind knowing that your housing loan interest rate will not change despite any sharp rise in market rates.
Cons of a fixed interest rate: In some cases, fixed-rate mortgages are more expensive than variable rates.
2. Variable interest rate
A variable interest rate on a housing loan or adjustable-rate mortgage varies according to changes in market interest rates during the entire loan term. Typically, it starts below the market rate and then gradually goes up.
Pros of a variable interest rate:
- More affordable than fixed rates. Aside from the low initial interest rates, you’re likely to make lower total interest payments with an adjustable rate compared to a fixed rate.
- The ideal choice in a declining interest rate environment. Variable rates are favorable when market interest rates are falling.
Cons of a variable interest rate:
- Varying mortgage payments. This makes budgeting a challenge, as it’s hard to predict the exact amount of your monthly loan repayments.
- A sense of uncertainty. During an economic crisis when market rates increase, so will the variable interest rate on your housing loan.
Which is the Best Housing Loan for You?
Certainly, there is a housing loan that suits your specific needs and financial capacity. You just need to use a free online comparison site to make finding the best housing loan for you a lot faster and easier.