A real estate broker invites you to take a peek at a new model home and then offers you zero percent interest on an expanded payment scheme. He tells you that you only need a few thousands to get the ball rolling and that you can now avail of a housing loan for 25 years. Doing a little math in your head, the contract price divided by 300 months equals a manageable amount. You look around the beautifully interior decorated home and are at the verge of making a reservation. Should you do it?
In case you haven’t heard, the subprime mortgage crisis in the United States started with too fast credit. Credit was getting easier and easier to obtain at a time when the real estate market was booming, that is, until the bubble burst. Just because the payment terms are so attractive doesn’t mean that you won’t be spending a good amount of money for the privilege of getting your house upfront.
For many Filipinos, owning a home is probably one of the most important goals apart from sending children to school. It is one of the reasons many workers go to great lengths to get employed even halfway around the world. The concept of a secure abode is deeply embedded in his psyche.
While some financial advisors may suggest that the money spent on monthly amortizations could be used building a business, for example, some Filipinos will prioritize buying a lot, a house, or both. In a country plagued with political and economic instability, the home is the last stronghold and a place to nurture close family ties.
There is an abundance of mortgage advice everywhere that it is easy to get confused. More often, a little common sense goes a long way. To cite, a registered financial planner in the country has suggested that getting a back-to-back loan to finance mortgage payments is actually a good idea. Back-to-back loans are basically credit amounts that you obtain based on your bank deposits that serve as collateral. For example, if you put Php100,000 in time deposit at 5% return, you are allowed to borrow the peso amount and pay a higher interest, say 9% per annum. The loan interest rates charged are usually lower than a regular personal loan because your loan is backed by cash collateral. It is not possible to liquidate or use your time deposit if it is under lien, when the bank holds it as collateral for a loan. The bank still earns in the end, with the 4% interest differential.
If you think about it, it doesn’t seem to make sense to be paying the 4% differential if the money will not earn you more. For example, if a bank loan is granted for a business venture that earns 10% then the 6% difference would have been a positive one.
On the other hand, if you obtained a loan to purchase a house that does not expect financial returns, then it seems logical to pay in cash, if you had the money in the first place. Why pay an extra 4% differential when you have the money in your hands and do not expect to use the cash for profit-earning ventures?
Personal finance guru Suze Orman explains, “Most people do not like to touch the cash they have in reserve, because money in the bank makes us feel safe. But sometimes you jeopardize your safety by holding on to what you have rather than using it wisely….It is important that you remember that this money has not disappeared but is in your home. And it may be safer there than in your accounts.” She also suggested that one way to buffer from these huge mortgage cash outlays would be to get a line of credit to be used only for emergencies: “What we want here is a source for emergency cash only; if you never have to use those funds, it shouldn’t cost you anything….If you do this, then in case of an emergency you have access to some extra cash and you do not have to feel afraid. Also, chances are good that any payments for whatever money you do use from the line of credit will be far less than your mortgage payments were.”
Another decision you need to make is how much equity to put into your house and lot upon purchase, in other words, the down payment. Attractive financing schemes do not liberate you from the obligation to pay back the loan at a certain time. The longer you wait, the more interest you need to pay. You also need to determine how much credit your monthly salary can handle and whether the total interest payments you will make actually represent a good value of the property purchased. For example, a 10 year loan with 10% per annum interest rates on your mortgage would be enough to double the total loan contract price.
You also need to calculate the cost of money from your end. If you do decide to purchase a big chunk of your property on borrowed money, the monthly amortization that you pay the bank could have been used for other money-earning activities. Thus, having a big loan to pay automatically removes you from other investing opportunities that could have increased the value of your money.
Buying a home is a personal choice. It is always best to learn how to save and to spend within one’s means. If you cannot afford it yet, it may be a good idea to postpone major purchases until the right time. Consequently, the most opportune moments come to those who wait patiently and intelligently.