For most people, purchasing a house is a once in a lifetime experience for most of us. Majority of buyers acquire homes on a mortgage loan as it is hard to find enough liquid capital to finance the purchase outright.
Being a big-time purchase, it’s crucial to plan and research well before making an all-important financial decision.
Buyers who are not able to plan well will have to resort to band-aid fixes should they encounter issues paying their monthly amortizations. Homeowners also face the risk of foreclosure which can be a stressful experience which entails additional expenses for redeeming the property from the bank. Before committing to a mortgage understand what it is involved in this type of arrangement and how you can make the best out of it.
A mortgage is a loan that uses the property as collateral. In mortgage loan agreements, the borrower gets cash from the lender to use to purchase the home. In exchange, the lender will have the rights to the property as collateral in case of payment defaults by the mortgagee.
The first mention of a mortgage in history dates back to 1190 in England. Common law documents had references explaining how the mortgage system worked. It described a mortgage as a conditional sale where the creditor retained title to the property while allowing the debtor to sell the property so he could get back the money he has paid thereon.
In the Philippines, the oldest law relating to mortgages is the Spanish Mortgage Law. Spanish decrees on land grants were based on the concept of jura regalia, or that lands belonged to the Spanish crown as a fruit of conquest. The Spanish government issued royal grants to Filipinos which they used as basis for ownership. However, the system of land registration under the Spanish Mortgage Law was discontinued during the time of President Marcos when he enacted Presidential Decree No. 892.
Parties in a mortgage arrangement
The buyer gets cash from the lender to pay the home with the responsibility to pay the lender in full in a fixed amount of years. Also called a mortgagor, he puts up his property as a security for his loan.
Mortgagees, who accept the security in exchange for a loan, are typically banks. They give out loans to borrowers for them to be able to purchase the home while paying the loan over a fixed amount of years. With banks, it is much easier for the average professional to acquire a house through a debt instrument called a mortgage.
Some developers offer inhouse financing so that the buyer need not go to a bank to obtain a housing loan. This arrangement typically requires the buyer to pay 10 to 30% of the down payment and present proof of income. However, the disadvantage is that inhouse financing offers shorter payment terms than banks, with some requiring the loan to be paid in as short as five years.
Types of mortgages
Mortgage schemes in the Philippines typically fall either under a conventional or fixed-rate mortgage, or flexible or adjustable-rate mortgage.
A mortgage agreement is a loan agreement wherein the interest on the loan remains the same throughout the loan agreement. This agreement is most common in the industry today.
One advantage of a fixed-rate mortgage is that it offers predictability since you know how much of the principal amount and the interest you will be paying each month. However, fixed-rate mortgages have higher interest rates than adjustable-rate mortgages.
An adjustable-rate mortgage agreement is a loan agreement wherein the interest on the loan gets adjusted periodically based on the market index of which reflects the cost of the loan to the lender.
Flexible mortgages are a great option for people who expect to move or sell their house in the next few years. When interest rates fall, your monthly payments will also go down. Yet this flexibility in payment terms is a double-edged sword. When interest rates go up, your monthly payments will also increase, though subject to payment caps. This type of arrangement is also governed by complicated rules,
When banks and financial institutions give out loans for mortgages, they have a responsibility to approve only when the borrower has the capacity and stability to pay. Irresponsible writing of loans can cause the whole economy to go crisis as what happened with the United States in 2006. With this, it is crucial for banks and financial institutions to be prudent in writing loans. Over the years, the requirements for getting a home loan has become stricter with the lead of central banks. Below are some of the most common requirements banks and financial institutions ask for before approving a loan.
- Financial Stability. Banks and financial Institutions check that borrowers are steady and committed to their jobs with no outstanding credits to other banks or financial institutions.
- Down Payment. Banks and financial institutions typically require a down payment of 20% of the purchase price.
- PaySlip. It is a norm for banks and financial institutions to know how much the borrower earn so they could assess his capacity to pay.
- Certificate of Employment with Income. The Certificate of Employment with Income is used to verify the borrower’s employment and income status.
- ITR (Income Tax Return). The income tax return is used to verify the borrower’s earnings.
- Background Check. It is vital for banks and financial institutions to determine if the borrower has family and friends who depend on him financially. Banks and financial institutions review the lifestyle of the borrower to determine any financial risk.
- Positive Credit Score. Though credit scores are mostly used in the United States, the Philippines has been catching up on this practice, too. Filipinos can get a credit report from the Credit Information Corporation, a government agency under the Securities and Exchange Commission tasked with keeping a centralized public credit registry.
Tips for getting a mortgage
The decision to get a mortgage includes many factors such as interest rates, financial stability, and market conditions.
Interest rates play a significant factor in how much a borrower pays over the years. Knowing how the central bank influences interest rates help when to take on a mortgage with reasonable interest rates. Typically, when the economy is doing well, interest rates are high as central banks stabilize the economy to avoid hyperinflation. When the economy is going down, central banks lower interest rates to stimulate growth. As such, the best interest rates are offered when the economy is at a crisis. In the Philippines, the typical mortgage rate in the Philippines is at 5.5%Professionals who have a sustainable, stable job and are starting a family should commit to a property long term as this is one of the safest investments one can make. According to Property Guide, the Philippines has shown strong growth in the residential property market for the past eight years. In the Philippines, property seems to be the number one investment instrument in the Philippines that could go well for the average investor. With a good yield in real estate prices, planning your mortgage well now can pay off in the future.