LESSON 5

FINANCING A HOME

TOPICS
1. Financing a Home
2. Types of Home Loans
3. Housing Loan Terms

LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Discuss home financing
2. Identify types of housing loans
3. Define housing loan terms

TOPIC 1. FINANCING A HOME

A Housing Loan is a loan/financial help provided by a bank or

a financial Institution to help in buying and/or modifying the
property. Housing loans are also commonly referred to as
'mortgages'. In the Philippines, housing loans are available
from banks, developers, or the housing Development Mutual
Fund, better known as Pag-IBIG. A housing loan is a financing
facility that provides funds for the following:
 Acquisition of a fully developed lot
 Purchase of a residential house and lot, townhouse, or condominium unit
 Construction or completion of a residential unit on a lot already own
 Home improvement or renovation of existing residential property
 Refinancing of an existing housing loan

Housing Needs
The basic needs of men are food, shelter and clothing, among these three the most
sought after need is to build a suitable shelter. Many Filipinos dream about having their
own home. However, buying a house or a property in the Philippines can be quite
expensive. In fact, the Bangko Sentral ng Pilipinas reported that property prices grew at
a rate of 12.4% during the first quarter of 2020. Fortunately, despite the rising prices of
properties, still a dream house can be acquired with the help of a housing loan. In
layman’s term, a home loan is simply borrowing money with interest for a specific
period of time to buy or to renovate a house. A few years back, this definition was
enough to define the meaning of home loan but today the competition between banks
and their services changed the meaning of home loan completely. Nowadays, home
loans have a bigger scope and banks offer these loans even for small needs about your
home.
 TOPIC 2. TYPES OF HOME LOANS IN THE MARKET

Filipinos usually apply for a housing loan to finance a

home purchase. However, there are other uses for a
home loan such as:
• Home Purchase Loan. This is the basic type of
home loan which is offered by every bank. Home
purchase loans are meant for the people who
are planning to buy a house or a condo. Most of
the banks would usually offer about up to
seventy or eighty percent of the appraised value
of the house or condo in the form of a loan.
• Home Construction Loan. Some people also consider building their own home
according to their needs and specification. To reach this goal, first a need for some
money to buy a land, and then more money for all the construction costs
(materials, manpower, architect, permits, etc.). For those people Home
Construction Loan is the solution.
• Home Improvement Loan. When a person own an ancestral house and want to
renovate it but lack the fund, then he does not to worry as home improvement
loan is the perfect solution for the problem. These are meant for persons like you
only who already own a home but want to repair it.
• Home Extension Loan. Home extension loans are given to those who want to
build an extra space or another part of the house that needs redoing, maybe a
part of the garden to be built as a new guest house or another room for a new
family member.
• Loan refinancing. The borrower can apply for a home loan refinancing when his
current mortgage no longer suits his needs. Basically, he is changing to a new
mortgage with better terms. This can allow him to switch from a variable-rate to a
fixed-rate and vice versa, which can help him save money.
• Home equity. The borrower can lend money against the property’s value with a
home equity loan. The funds can be used for other major expenses such as tuition,
travel, business, investment, and more.

Applying for a home loan can be complicated and frustrating because of all the
paperwork involved, and sometimes it seems that everyone has a full
understanding of what is going on, but the borrower. The best solution before
doing something is always to do a research, to be diligent about the project, and
of course to look for the right loan officer that will help him understand everything
there is to know about the product he wish to avail.

Housing Loans in the Philippines

When taking out a housing loan in the
Philippines, there is a need to enter into an
agreement with the lender (usually a bank) and
promise to repay the loan over an agreed length of
time (also known as the 'loan tenure' or ‘loan tenor’).
Filipinos have two options for housing loans: public,
in the form of PAG-IBIG, and private, in the form of
banks. Major banks that provide housing loans
include BPI, Metrobank, and Security Bank; their
housing loan rates can be compared. Interest rates for
housing loans in the Philippines differ from bank to bank. For example, for a 20-year
period, the interest of one housing loan is 5.50% 1 year fixed term, while for Security
Bank it’s 5.25%. In a typical Philippine mortgage, make monthly payments for the loan
tenure until fully repaid both the principal of the loan and the interest. During the early
years of the loan, the majority of the monthly payments will be used to repay interest,
however, as time passes, a larger proportion of the payments will go into paying down
the principal. Because the interest is calculated based on what owe on the loan each
month, by paying a little bit extra each month, the interest in subsequent months will be
lower.

Classification of Home Loans in the Philippines

• A Conventional Loan requires a borrower to make fixed monthly payments for a
specific term or period. This is ideal if the borrower is looking for a predictable
payment scheme and want to plan the finances ahead. Philippine banks provide
their clients home loans with a loan tenure of up to 20 years for a minimum of
P500,000. This type of repayment scheme enables a borrower to properly manage
his finances because the payments are predictable.

• Flexi loans are conventional loans that are tied or linked to a current account.
Borrowers can reduce their home loan interest every time they deposit cash to
their current account. Excess payments can also be withdrawn anytime without
giving the bank any notice. Borrowers can also start their principal repayment
anytime they want. Banks usually offer this type of home loan. The borrower can
control the interest rate of the flexible home loan, depending on how much he will
deposit. He can also start principal repayment anytime.

TOPIC 3. HOUSING LOAN TERMS

• Principal. The total amount borrowed or owed on any type of loan. Making
monthly payments on a basic fixed-rate loan will gradually reduce your principal.
• Down payment. An upfront payment made by the buyer of a house. In the
Philippines, 20% is the usual down payment amount for a bank housing loan.
• Interest Rate. An interest rate is a rate that is charged for the use of money.
Interest rates are displayed on an annual basis, known as the annual percentage
rate (APR). For example, BPI's 10-year fixed loan has an 8% APR.
• Loan Tenure/Term. This means the length of time or period in “months” or
"number of years" wherein the borrower can repay the housing loan. If a
mortgage has a "tenure" of 30 years, it usually means it would take 30 years to
fully pay off the loan. The usual term for housing loans in the Philippines is up to
20 years. Generally, the longer the loan term, the higher the interest rates.
• Fixed rate. For fixed rate loans, the rate remains constant during the entire
tenure of the loan. Banks offer fixed-rate loans where the borrower is locked-in for
low rates and he is spared from the fluctuating rates depending on the years
agreed. He can have a fixed rate of 3 to 5 years, but it also varies depending on the
banks’ discretion and assessment of the home loan application.
• Collateral. An asset which the borrower can pledge to the lender as a security for
the home loan. The banks, for example, can ask for collateral of the borrower land
title if he is borrowing money for home improvement. In case of a foreclosure, the
bank has the right to sell the land and claim a legal right.
• Prepayment. Fully or partially paying off the borrower loan before it is due. Some
banks will charge a penalty for this, so read the fine print.
• Refinancing. Paying off an existing housing loan with a new loan that has lower
rates.
 • Foreclosure. When the bank repossesses the property and attempts to sell it in
order to settle the outstanding amount on the loan. This usually happens when
borrower consistently fail to pay his loan instalments.
• Margin of Finance. The margin of financing is also known as the loan-to-value
ratio. Banks in the Philippines base the amount that a client can borrow on the age
and income bracket of the applicant, property type and location and the current
value of the property on the market. The typical margin of finance given to
borrowers is 80%. So if the borrower is going to apply for a housing loan to finance
a P1,000,000 housing in a key location in Manila he is eligible for a loan amounting
to P800,000, meaning he will have to put up the remaining P200,000 himself as a
down payment.

Eligibility for a Housing Loan. Here are the general eligibility criteria the borrower must
follow to qualify for a housing loan application:
 Must be between 21 to 65 years old upon loan maturity
 Must be a Philippine resident
 If an OFW, special power of attorney must be provided as well as contract or
certificate of employment (COE) approved by the Philippine Overseas
Employment Administration (POEA)
 If the borrower is a foreigner, he must meet VISA requirements and submit the
Alien Certificate of Registration.

How Will Eligibility Be Evaluated? When applying for a housing loan in the Philippines,
the lender will evaluate the application and ability to pay off the amount the borrower
wish to be granted base on the following:
 Income. How much the borrower earn plays a huge part in getting a home loan.
Banks are more inclined to look into the credit standing and income stability
before granting the loan request. Pag-IBIG, on the other hand, considers the
contribution and net disposable income.
 Age. The lender will base the maximum length of term for the housing loan on the
borrower’s age. For example, if the borrower is already 45 years old, he may not
be allowed to get a 30-year Pag-IBIG loan because it is required that he complete
paying off his mortgage before turning 65 years old. However, an exception can be
made if he can find a company to insure him beyond the age of 65.
 Spouse’s income. If the borrower is applying for a home loan with his spouse,
their income will also be evaluated.
 Dependents. The lender can base the borrower’s ability to pay off a loan on the
number of dependents he has.
 Stability and continuity of occupation. The borrower must be employed for at
least two years when applying for a housing loan. If he is self-employed or own a
business, he may still get a housing loan approval. He might have to submit
additional information about the taxes, profits, income, business permits, and
other relevant documents.
 Loan amount. Banks allow a minimum loan amount of PHP 800,000 on average.
However, this still depends on the location of the desired property. Projects
outside Metro Manila may result in a lesser loan amount. For in-house funding,
the loanable amount depends on the real estate developers. Pag-IBIG grants a
loan amount of PHP 600,000 to PHP 6 million. However, the lender may meet
certain conditions such as the capacity to pay and the actual need for funds.
 Credit history. The credit history also greatly affects the housing loan eligibility.
This serves a record of responsible repayment of debts. The credit history is
created through collating data from various sources like government agencies,
banks, collection agencies, and credit cards. If the borrower has any credit history
 yet, he can build his by getting a credit card from the same bank he intend to
borrow from. Then, he can use the card regularly and pay his bills on time. As he
build a good credit history, he will get to prove that he has a stable source of
income, know how to be responsible with his bills, and can pay dues on time.

Fees and Charges:

 Appraisal fee
 Registration expenses
 Transfer tax of 0.5% to 1.5% of the house’s purchase cost, depending on its
location
 Handling and Notary fees
 Loan arrangement fees
 Documentary stamp tax, which can be 1.5% of the purchase cost or (P1.00 for
every P200 of the loan amount)
 Tax Mortgage Redemption Insurance

Important Aspects of a Housing Loan

Some of the aspects of a housing loan a borrower should know about are:
 Monthly payment. The borrower must have sufficient income to get a loan
approval. He should have a monthly income that is at least three times more
than his monthly payment.
 Down payment. This is the amount to be paid upfront when purchasing a home.
The down payment affects the home price the borrower can afford.
 Loan tenure. The total interest paid is directly proportional to the loan tenure.
The higher the tenure, the higher the total interest paid, and vice-versa.
 Type of interest rate. The borrower can choose between fixed-rate and variable-
rate terms. The former is a good option for those who prefer consistent monthly
payments. The latter has interest rates that vary as market interest rates change.

Early Termination Penalty:

Some mortgage lenders may apply an early termination penalty if the loan is paid off in
part or in full within a specified time period, including if refinance the loan with another
lender. This specified time period where borrower are liable to pay an early termination
penalty is called the 'lock-in period'. Depending on the term and size of the loan, this
charge can be quite significant.

Joint Housing Loan. If the borrower is married, he and his

spouse can apply for a housing loan together. The lender will
evaluate both of them, according to their combined gross family
income. This may allow them to borrow more. But, if the
borrower is single, he can still apply for a joint housing loan with
a co-borrower. The co-borrower will be equally responsible for
repaying the loan. Note that he and your co-borrower will have to undergo the standard
loan application and evaluation process.

The Interest Rates

Lenders offering conventional housing loans charge an interest rate of 6.5% to 12%. This
rate is fixed for the first year, first two, or first five years of the loan, depending on the
agreed period. Once this period ends, the interest rate will change based on the
prevailing market rate. For Pag-IBIG housing loans, the interest rate is at 5.5% per
annum. However, there is an opt-out option for the first year of the loan. This applies to
house loans of up to PHP 6 million. As mentioned, there are two types of interest rates
that borrower can choose from—fixed rates and variable rates.
Fixed interest rates. With a fixed interest rate, the monthly payments remain the same
over the agreed period, even if the market rate changes. This is perfect if the borrower
wanted to easily allot an accurate budget for the mortgage payment.

Variable interest rates. A housing loan with a variable interest

rate will have varied monthly payments. The interest rate
moved with the market during your loan’s entire term.
Typically, the interest rate you have to pay will start below the
market rate and may gradually go up.

What are the loan terms?

The loan term depends on the borrower’s eligibility. Banks and Pag-IBIG usually offer a
maximum term of 30 years for him to pay off his housing loan. For in-house financing,
the period can be as short as five years.

The Reasons for Being Denied a Housing Loan: The home loan application may be
denied due to several factors such as:
 The lender is not convinced that the borrower can pay off the amount he wish to
borrow. This is usually based on his income, the number of dependents, income
stability, and credit standing.
 The borrower does not meet the eligibility criteria.
 The borrow fails to provide the necessary documentation.
 Other issues regarding the loan amount the borrower applied for.