To take out any type of secured loan, you must have collateral with a corresponding value to the amount of money being taken out as a loan. Some loans are only available when the borrower can pledge certain assets as collateral.
A mortgage is a loan to maintain or purchase landed properties like houses, lands, and other real estate firms. The borrower pledges a landed property like a house, land, or any other form of real estate as collateral. It can be a house owned by the borrower or, in most cases, the house is purchased with a mortgage loan. The borrower is expected to make a down payment of about 5% of the purchase price, while the lender pays for the remaining 95%. The 95% purchase price paid by the lender serves as the loan money, while the property bought is the mortgage insurance. Mortgage loans usually have cheaper interest rates compared to other types of loans. This article has all the necessary information related to a mortgage.
What is a mortgage?
A mortgage is a type of loan made available by a mortgage bank or lender, which allows the borrower to take out money to buy a house or any other landed property with the property purchased as collateral. The property serves as a form of mortgage insurance to the lender. If the borrower defaults in making the monthly mortgage payment, the mortgage lender can foreclose on the property. A mortgage is paid back over time in a series of periodic payments divided into interest and principal.
The borrower can choose to make mortgage payments by paying a fixed principal amount with a stipulated interest rate over a set term of 15-30 years. Mortgage loans taken out with such payment terms are called fixed-rate mortgages. On the other hand, the borrower may opt for adjustable rate mortgages where the interest rate isn't fixed but varies based on the market rate and other factors.
The interest rate for adjustable rate mortgages is fixed for the first 5 years, after which it varies based on the market rates. Due to the consistent fluctuation of interest rates and the amount to be paid monthly, the borrower doesn't always know what to expect as the monthly mortgage payment amount and is often unprepared for the amount levied on him or her.
Fixed-rate mortgages have a fixed interest rate, and the borrower must pay the principal monthly, irrespective of market rate fluctuations and other factors. This allows the borrower to plan for the loan payment every month by making the necessary adjustments in their monthly budget. The less time a borrower takes to make the mortgage payment, the less interest they have to pay. For a 30-year fixed rate mortgage, the average interest rate as of July 2022 is 5.30%, for a 15-year fixed rate mortgage, the rate is 4.45%, and for a 5/1 adjustable rate mortgage, the rate is 4.19%. The cost of a mortgage loan depends on the property purchased, the interest rate charged by the mortgage lender, and the term (like 15-30 years). It can also vary based on the borrower's qualifications.
Mortgages are also referred to as liens against claims on properties. In cases where the borrower defaults in making monthly payments of the loan, the lender is permitted to foreclose on the collateral, which serves as mortgage insurance, sell it, and use the money to repay the outstanding mortgage loan.
Where can I get a mortgage?
Mortgages can be acquired from various mortgage lenders like:
Banks
Banks are mortgage lenders. They get their money from their customers and investors. Banks offer various types of mortgages to qualified members. Below are some banks that offer mortgage in the Philippines at average mortgage rates:
Security Bank. Security Bank offers a minimum principal loan amount of ₱1,000,000 and a maximum amount of ₱100,000,000. Their minimum loan term is 12 months, while the maximum is 25 years. Their interest rate is 6.25% per year for 1 to 3 years and 7.75% for 10 years. The processing length for acquiring a mortgage from the security bank is five days.
Banco de Oro. Banco de Oro offers a minimum principal loan amount of ₱500,000 and a maximum amount of 80% of the appraised value. Their minimum loan term is 12 months, while the maximum is 20 years. Like security banks, their interest rate is 6.25% per year for 1 to 3 years and 7.75% for 10 years. The processing time is five days (for individuals within metro manila).
Metrobank. This is another mortgage lender bank that offers a minimum principal loan amount of ₱500,000 and a maximum amount of 90% of the appraised value. A minimum loan term is 12 months, while the maximum is 25 years. Their interest rate starts at 5.50% and the processing time is 15 days.
Philippine National Bank. This bank offers a minimum principal loan amount of ₱500,000 and a maximum amount of 80% of the appraisal value. These loans come with a minimum loan term of 12 months and a maximum of 20 years. Their interest rates start from 5.50% per annum and the loan processing time is 10 days.
Bank of the Philippine Islands. Bank of the Philippines offers a minimum amount of ₱1,000,000 and a maximum amount of 80% of the appraisal value. They offer a loan term of 12 months to 20 years. Their interest rate starts at 5.25% per annum, and the loan processing time is five days.
China Bank. Chinabank offers a minimum principal loan amount of ₱500,000 and a maximum amount of 80% of the appraisal value. They offer loan terms ranging from 12 months to 25 years. Their interest rate is 6.5% per annum, and the loan processing time is 6-7 days.
Union Bank. Union Bank offers a minimum principal loan amount of ₱500,000 and a maximum of 90% of the appraisal value. They offer loan terms ranging from 12 months to 20 years. Their interest rate starts at 6% per annum, and the loan processing time is 10 days.
Rizal Commercial Banking Corporation. This bank offers a minimum amount of ₱300,000 and a maximum amount of 80% of the appraisal value. They offer loan terms ranging from 12 months to 20 years. Their interest rate starts at 8% per annum, and the loan processing time is 10 days.
Credit unions
A credit union share similarities with a bank but are owned by and get funds from its account holders. Like the banks in the Philippines, a credit union also offers different types of mortgages to applicants. Many types of credit unions in the Philippines offer a good loan-to-value ratio. To know more about this, you can simply search about the best credit unions for mortgages online. Some of the best available credit unions that provide mortgages are:
Rizal Commercial Banking Corporation (RCBC). RCBC offers mortgages starting with a minimum amount of ₱1,000,000 and a maximum of up to 80% of the appraisal value. They offer a loan term of 12 months to 20 years. Apart from that, the interest rate starts at 5.50% per annum.
Hongkong and Shanghai Banking Corporation (HSBC). HSBC offers mortgages starting with a minimum amount of ₱700,000 and a maximum of up to ₱50,000,000. They offer a loan term of 12 months to 20 years, and their interest rate starts at 5.19% per annum.
Maybank. This credit union offers mortgage loans starting at ₱500,000, one of the lowest among many of its competitors. The maximum of up to 80% of the appraised value. They offer a loan term of 12 months to 20 years, with fixed interest rates for up to 5 years. Their interest rate starts at 6.75% per annum.
Mortgage lenders
A mortgage lender is a financial institution that originates and funds a loan in its name. Unlike the credit unions and banks, This lender exists for the unified purpose of issuing loans against landed properties. Mortgage lenders get their funds from banks, also called investors. They sell off their loans to servicing companies or banks who take up the responsibility of collecting loan payments per month. They carry out their in-house operations, loan processing, and underwriting process using their internal staff. They also offer different types of mortgages.
Mortgage brokers
Mortgage brokers serve as “middlemen” between the bank and the homeowner or buyer. Mortgage brokers don't directly lend money but can direct a loan application through the mortgage market. They have access to various lenders and loan programs. Their job is to scan the mortgage market and connect the homeowner or buyer seeking a mortgage to a lender, especially if the buyer has a low credit history. They also assist borrowers in getting homeowners insurance, paying property tax, and other such activities.
Non-bank mortgage lenders
These include companies that provide their services only online and, most of the time, specializes in mortgage loans. They are fast and are a favorable option for individuals with low credit scores.
What are the major types of mortgages in the Philippines?
Mortgage comes in different forms, but the most common in the Philippines is the 15-30 year fixed rate mortgages. Other mortgages run for 40 years, while some have a shorter term of about 5 years. When payment is stretched over the years, it reduces the amount to be paid monthly but increases the total interest rate to be paid over the loan taken out. Below are some of the most popular types of mortgages.
Fixed-rate mortgage
This is the standard type of mortgage. In fixed-rate mortgages, the interest rate and the amount to be paid by the borrower monthly are fixed throughout the life of the loan. A fixed-rate mortgage can also be called a traditional mortgage. It is important to note that the longer the repayment term of a fixed rate loan, the more the interest rate the borrower has to pay. One major advantage of the fixed interest rate mortgage is that it allows the borrower to avoid additional charges that may arise from defaulting in paying up the fixed amount for a particular month since he or she has ample time to prepare and adjust their budgets to meet up with the required monthly repayment amount. Another advantage of a fixed interest rate mortgage is that, even if there is a significant rise in the market rates, the borrower isn't mandated to pay higher monthly amounts.
Adjustable rate mortgages
This type of mortgage comes with average interest rates that increase throughout the life of the loan. The interest rates of adjustable rate mortgages are subject to market rates, so in cases where there is an increase in market rates, the interest rate to be paid will also increase. This means that the borrower doesn't get to pay a stipulated amount every month. The most popular type of an adjustable rate mortgage is the 5/1 ARM. This mortgage offers an interest rate fixed for the first 5 years irrespective of the market rates. While adjustable rate mortgages are difficult to pay because of the ever-changing and increasing monthly amount, they are popular in the Philippines because they come with a cheaper starting interest rate than fixed-rate mortgages. Borrowers hoping their income will increase over time tend to initially opt for an ARM interest rate. It should be noted that with adjustable rate mortgages, the borrower is at higher risk of losing the collateral through foreclosure since the interest rates can rise to a point where he or she starts defaulting in meeting up with the total monthly payment of the loan principal amount which will further lead to a balloon mortgage.
Interest only mortgages
This type of mortgage loan requires the borrower to pay only the interest rates for a stipulated time without the principal amount changing. It is often tagged as a type of an adjustable rate mortgage. The borrower pays the interest for 5-10 years before he or she starts paying for the principal and interest. At this point, the interest may start to vary based on the market rates. An interest-only mortgage allows the individual borrowing money to pay lower monthly amounts since the principal is not included, which gives him or her enough time to save up for the principal. On the other hand, the home buyer won't be able to build up any equity on the property since only the payment of principal guarantees that. Also, the inclusion of the principal at a later time may pose a great difficulty to the borrower if it collides with a negative turn in the borrower's finances, such as loss of job.
Reverse mortgages
This type of mortgage loan is available to older homeowners of about 62 years of age who desire to convert a part of the equity in their homes to money. A reverse mortgage can be referred to as a home equity conversion mortgage. The homeowners can take out a loan amount against their home value and receive the money as a lump sum, line of credit, or a fixed monthly payment. The loan balance is due when the borrower dies or sells the house.
How to apply for a mortgage in the Philippines?
Mortgage applications in the Philippines vary based on the lender chosen by the borrower. However, the following are general steps to apply for a mortgage.
Check your credit score and eligibility.
This is the first step to take when applying for a loan. Most lenders find it difficult to issue mortgage loans to applicants with poor credit scores. Make efforts to boost your credit score by paying offsetting dues. You should also consider other areas of eligibility, such as age and income rate. To be eligible for a mortgage loan, you must:
Be at least 21 years old but do not exceed 70 years old throughout the life of the loan.
Be a Filipino Citizen or a foreign national with international documents.
Have a monthly gross income of p ₱30,000 –₱ 50,000.
Have a stable income source.
An employed borrower has at least 2 years of work experience with the current company.
For a self-employed borrower, at least 2 years of business operations.
For Overseas Filipino Workers, 2-3 years of work experience with the current company.
Compare the interest rates
Different lenders have different interest rates. Therefore, the intended applicant should compare lenders like banks, credit unions, online lenders, and other financial institutions to find the fixed-rate loans that suit them better. Currently, HDMF, popularly known as Pag-IBIG, offers one of the best mortgage loans with a maximum amount of ₱6,000,000 and interest rates starting at 5.75%. Loan applicants can go for a 25 or 30-year payment term or a 5-year term if they can repay the loan in a shorter time frame. They can also use the available financial loan calculator to estimate their monthly amortization based on the amount they intend to borrow.
Get your documents ready
Unlike a conventional loan, a mortgage loan is very high-risk and shouldn't be taken up lightly. Before an applicant takes the next step of getting pre-approved, he or she should ensure that they have the financial stability to carry the interest rates that come with such loans, clean up their credit score by paying off the necessary dues, and gather their documents like government agency approved IDs, proof of income, paperwork showing the legitimacy of the property to be acquired from the seller, and some others.
Get pre-approved
To be pre-approved, your preferred lender would require the loan applicants to submit their current bank statements, employment information, recent income tax return, proof of income, and other documents that would help the lender validate your capacity to repay the housing loan. If the borrower is successfully approved, they will be given a GFE (good faith estimate) which contains information about the terms, type of loan, interest rates, and closing cost.
Get an appraisal
At this point, the lender will verify the property details you make available, such as the home title. The lender can also schedule any other required inspection. You will receive a closing disclosure when the underwriting and verification are complete. A closing disclosure gives you all the information you need about the mortgage loan. It includes your interest rate, closing cost, monthly, and down payment.
Call for a closing
After getting approved and finalizing the terms of the deal with the property seller, the buyer can call for a closing where he or she makes a down payment to the lender, which is usually about 5% of the amount for the purchase of the property. The seller receives the amount agreed upon for the property from the lender and transfers the ownership of the property to the buyer. In closing, you have a chance to get last-minute clarifications on any confusion you may be having in regard to the loan terms. The borrower, at this point, can sign the remaining mortgage documents provided. Sometimes, the lender can charge an additional fee known as a closing fee in the form of points for originating the loan.
What are the main requirements for getting a mortgage?
The process and interest rates of acquiring a mortgage loan vary among lenders and buyers. However, some boxes must be ticked off before getting a mortgage loan anywhere in the Philippines. They are:
Documents
Most lenders will require documents about your identity like name, age, employment, and income status. You must have all the necessary documents in the correct form to ensure a smooth mortgage process. The basic documents that will be required are:
An accurately filled application form.
Two valid passport IDs.
2-3 government-issued IDs with a signature and photo.
For your employment and income details, the documents required are:
Certificate of Employment showing salary, service time frame, and position.
Income Tax Return for the past 2 years.
For a self-employed individual, the documents required are:
SEC Registration Certificate with an article of incorporation and by-laws.
An audited financial statement for the past 2 years
Proof of DTI Registration.
Recent income tax return.
Statement of assets and liabilities for the past 2 years.
Bank statements for the last 6 months
List of trade references with at least 3 names and phone numbers of primary customers.
Mortgage reserves
Mortgage reserves are also called cash reserves. They are funds a borrower needs in addition to the down payment and closing costs. They are required to prove his/her capability to pay off several months of mortgage loan payments in an emergency. Depending on your DTI ratio, down payments, and credit scores, about 6 months of mortgage reserves may be required from the borrower.
Down payment
This is the first payment the borrower makes to offset the loan amount he or she intends to borrow. You may be required to make a minimum down payment of about 3% or 3.5% of the purchase amount. The down payment can come from your own money or a gift from a family member.
Credit score
Lenders are particular about the financial capacity of their borrowers and would require to know your credit score. The federal housing finance agency offers loans to individuals with a credit score of 500. However, other lenders may differ. It may not be easy to find a lender who would give out mortgage loans to individuals with a credit score below 620. Higher credit scores will likely give you better mortgage rates and low PMI premiums.
Debt-to-income ratio
A borrower's DTI (debt-to-income) ratio is calculated by dividing the total debt by his/her gross monthly income. Some lenders prefer giving out loans to individuals with a DTI of 45% or lower, while others raise it to 50% with higher credit scores and added mortgage reserves.
Closing cost
This fee is paid at the closing, without which the loan approval process won't be completed. The closing cost can include application, title insurance, credit report, survey, origination, prepaid, escrow, processing, and survey fee. The average closing fee for a mortgage loan in the Philippines is about 2 to 5% of the purchase price.
How to repay a mortgage?
Most homeowners can't wait to be free of the burden of paying for mortgages. Most of the lenders ask borrowers to fill out an ADA (auto-debit arrangement) form. It will allow the lenders to debit the monthly payments automatically from the borrower's bank account. However, there are other ways to pay off your mortgages faster.
Making lump sum payments. You can make bulk payments toward your principal. This saves you from the lender's fee for refinancing and recasting.
Making extra payments. You can either make biweekly payments or extra payments per month. To make biweekly payments, divide your monthly payment and pay every two weeks instead. This way, you can make about 13 monthly payments in one year instead of 12 months, saving you some interest. Ask your lender to know if this option is acceptable to them. If they don't, you can settle for saving up the biweekly payments and making a bulk sum of monthly payments instead. You can also make extra principal payments every month. This will help you pay off the loan faster and save a lot of interest.
Refinancing your mortgage. This step is a good call if you can secure a lower interest rate. However, you should know that refinancing your mortgage attracts some costs, so make sure it doesn't outweigh the savings. Refinancing into a loan with a shorter time frame will help reduce your interest rate and help you pay up faster. The only drawback is that a shorter loan term means higher monthly payments, which may strain your budget even more.
Recasting your mortgage. This entails you paying a bulk sum towards the principal. Your lender will adjust your amortization to show a new balance. This results in a reduced monthly payment. Recasting is less expensive compared to refinancing.
Pros and cons of a mortgage
With the points stated below, it will be clear that mortgages have both advantages and disadvantages. Therefore, you must do in-depth research about different lenders and their loan terms before taking out a mortgage loan.
Pros
They are affordable. Besides making house ownership and other real estate property easy, mortgages offer a long payment time frame of about 15-30 years. This makes the monthly mortgage payments very affordable.
They are lower in cost. Mortgage offers lower rates compared to other types of loans. This is the major reason a real estate property is employed as collateral. However, you will have to compare lenders to get one with an interest rate that suits you.
They offer capital appreciation. The value of real estate properties is steadily rising in the Philippines. If you take out a mortgage of ₱300,000 and the value of the collateral rises by about 20% at the end of the loan term, you will have accumulated some cash through the appreciation of your capital. In most cases, the capital appreciation may be higher than the loan interest, which allows you to recoup from the financial strain of paying for the mortgage debt.
They help in savings. Individuals with difficulty saving can take out mortgages if they have steady jobs and income flow. They can look at the monthly mortgage payment amount as their savings since they will become legitimate owners of a house with a higher value by the end of the loan repayment period.
They offer security. When you apply for a mortgage loan from a bank, they conduct an in-depth analysis of the real estate property to purchase. This action serves as homeowner's insurance. This is because they make sure the property has a reputable builder and is legal. They will also ensure the property isn't caught up in legal disputes. Thereby saving you the risk of making the wrong investment.
They increase credit capacity. The bank will classify you as a reputable borrower when making mortgage payments. This will increase your loan eligibility.
Cons
They require long-term obligations. When your loan receives a green light from the bank, you take up an enormous obligation of mortgage payments over a long time. The average time frame of a mortgage loan is about 10 to 30 years. This means you will be burdened with debt payments for much of your lifetime. You must be very disciplined to avoid overspending and defaulting on the loan payment.
They are risky. Mortgage payments can last for a long time, during which unpleasant and unplanned events can take place. Events like loss of jobs, accidents, and marital issues can place you in a tight spot making it difficult to afford the mortgage payments. This will lead to your property being foreclosed.
They create a loss of opportunity. A mortgage loan will prevent you from making other investments that can earn you more money. You have to forgo most arising needs to keep a steady run of monthly mortgage payments throughout the life of the loan.
Legal regulation of mortgages in the Philippines
The SEC (Security and Exchange Commission), Republic Act no. 580, the Bangko Sentral ng Pilipinas, interest rate regulation acts, and some other lending legislation control and governs mortgages. This lending legislation, along with the help of the federal housing administration (FHA), ensures the mortgage agreement between the lender and borrower adheres to all the legal regulations in the Philippines. This also ensures that excessive interest rates are not forced on the borrowers.
The real cost of a mortgage
Mortgage comes with various additional fees asides from the principal amount to be paid, and they are:
Documentary stamp tax. This is usually 1.5% of the purchase amount.
Transfer tax. This is 0.5% - 0.75% of the house amount, depending on the region you are making the purchase.
Notary fee. Depending on the deal arrangement, it is usually about 1% to 1.5% of the home's purchase price.
Possible loan arrangement fees
Registration fee. This is dependent on the property amount and location.
Down payments. This is usually 3% of the purchase amount.
Conclusion
A mortgage is a loan with the property purchased as the mortgage insurance. The interest rates attached to a mortgage loan vary from lender to lender. It is, however, a positive step to take if you want to own any valuable asset. But it is also important to ensure you are eligible and have a steady income flow to sustain the monthly mortgage payment schedule before you apply for a mortgage loan.
