For most Filipinos, the only way to buy houses is by signing up for long-term mortgages. With most property prices costing a million pesos or more, coming up with enough cash can be challenging enough. For households with regular bills to pay every month, it might make more sense to fork out much lower monthly mortgage payments. So, for many who cannot afford to pay the whole thing in cash or have other monthly payments to worry about, mortgages are for you.
What is a Mortgage?
Buying property is a great way to acquire an asset. Everybody needs shelter, so properties will always be something in demand. That’s why individuals who decide to start a family tend to look for establishing their own home. However, the price of properties varies due to several factors. Those situated in a better location, have better infrastructure support, and feature quality workmanship and material will fetch higher prices. When more people want the same properties in the same location, prices tend to shoot up.
For many working people, buying property via a single cash transaction is out of the question. Developers and lending institutions realize that the only way more people can afford homes is by offering long-term loans. This allows buyers to spread the payments into several years of lower monthly payments, but with interest. When you add in the interest, the buyer will definitely pay much more than the loan amount. Banks will point out that this represents the cost of lending money. A mortgage is a term used to signify a lender will front the money for buying a house in exchange for interest. More importantly, a mortgage signifies that if the buyer could not fulfill their payment obligations, the lender holds the right to foreclose the property in their favor.
Short or Long-Term Mortgages?
Mortgages can come in the form of a short-term contract period between six months to three years. These short-term mortgages usually carry a fixed low-interest rate covering the whole term. Lenders can afford to offer lower interest rates to short-term borrowers due to lower risks of defaulting. For property buyers who think that prices won’t change or even fall down in the next few years, a short-term mortgage might be a good idea. This is also a good option if buyers plan to flip their purchase sooner than later. Short-term mortgages are also great if your income sources won’t be adversely affected by a large purchase.
Meanwhile, loans that take three years or more to pay are called long-term mortgages. In these cases, lenders will charge higher interest rates. After all, they expect the money they lent to grow in value until they get fully paid. For buyers with fixed monthly incomes and plan to hold on to their purchase, long-term mortgages are ideal. Locking into long-term deals is also a good idea if loan interest rates are about to go up, which usually happens when inflation rates are likewise high. Typical mortgage rates run for 15, 20, and 30 years to pay. Monthly payments tend to go lower when terms are longer. However, interest rates are usually higher. As a result, borrowers tend to pay a lot more for long-term mortgages.
Fixed-term and Adjustable Rates
In addition, borrowers should check the terms of their interest payments. Fixed-term rates, while higher, lock the interest rate throughout the loan period. While this may sound ideal, borrowers who avail of this rate can lose out if interest rates go lower than the locked-in rates. In times of low-interest rates where inflation is low, availing of mortgages with fixed interest rates might be the best move.
Alternatively, borrowers can avail of adjustable interest rates, which allow lenders to adjust interest rates to better reflect market conditions after a certain period (usually five years). Availing of adjustable rates will cause your monthly payments to increase or decrease based on prevailing interest rates. When economic conditions improve and interest rates fall, your payments will also benefit from the decrease. However, when inflation continues to go up, expect your payments to go up as well.
Since there is no way of accurately predicting how rates will go in the next few years, exercise due diligence when deciding which interest rate option to get. A basic reading of the current market situation can go a long way in determining if things will get better or worse for the Philippines.
Which Mortgage is Best Right Now in the Philippines?
The Philippines, like the rest of the world, is currently experiencing high inflation rates due to the effects of the pandemic, the Russia-Ukraine stalemate, and global supply chain disruptions. However, while many analysts see the Philippines continue its economic growth streak, the effects of high prices might dampen the mood until conditions improve. Until then, interest rates will continue to remain high. In addition, real estate is traditionally a safe investment due to its ever-appreciating value. So while interest rates may go up and down, home prices will only gradually climb up.
When taking on mortgages, keep in mind that the shorter the term, the lower the interest rates. Ideally, everybody would want everybody to pay in cash. In reality, however, many first-time homeowners can only afford to front the down payment.
Choose What You Can Afford
In the case of mortgages, always choose the terms that you can afford comfortably. Long-term mortgages mean radically lower monthly payments. If your income stream steadily increases over time, you’ll be pleasantly surprised to find your last few years of payment as highly affordable. In addition, securing an adjustable interest rate might work in your favor if the Philippines does manage to completely recover from high inflation. For workers planning on purchasing their own homes, long-term mortgages might be the most practical and affordable way to do so.
On the other hand, a short-term mortgage means paying off your loan in the shortest time possible. Those currently operating a business that’s turning a profit might want to get shorter mortgages. Contract workers with a specific number of years will also find short-term mortgages a good deal. The bottom line: if you can afford a short-term mortgage, all the better for you. Just make sure you do.
Looking to Close a Long-term Mortgage? Let Ohmyhome Help You Get the Best Deals
Looking to buy your own home and avail of mortgage deals? Let Ohmyhome Philippines help you identify the best properties and the best mortgage deals today. Our extensive property listing contains over 80,000 property listings from over 150 of the country’s top developers. Our team of real estate professionals, backed by our excellent customer service team, can help you get the best deals by referring you to partner lenders.