Real Estate Loans (Mortgage): The Full Guide

Types of Real Estate Loans in the Philippines 

A mortgage is a type of loan where a person is granted the means through financing, the purchase of a house, or other forms of real estate. Real estate loans in the Philippines can be of two types: Home Loans (the most common real estate loan) and Business Mortgage Loans.

Home Loan

A home loan can be a means to satisfy a person’s financial needs whether to acquire a house and lot, refinance an existing home, acquisition of a vacant lot, or build or renovate an existing home. 

Depending on the purpose of the home loan, the loan terms, eligibility, and requirements will differ. The interest rate on housing loans can be as low as  5.19% (HSBC) with a term of up to 25 years, and a downpayment requirement of 20% to 30% of the total value of the property. 

When approved for a loan in the Philippines, the property itself is held by the bank as collateral. For example, a borrower applied for a home loan after paying a 20% down payment (also referred to as the home equity) for the purchase of his or her house and lot. The remaining 80% was purchased through bank financing. The bank then pays the property developer for the balance and takes the title as collateral. The borrower is free to live in the purchased house and lot and pays while paying for the home loan in the agreed term, usually between 10 to 25 years, or in the case of Pag-IBIG housing loans, the repayment period can be up to 30 years. 

Business Mortgage Loan 

This type of loan is designed to assist businesses as they scale up their business – whether it is through the purchase of real estate to aid it in the growth of their operations or through working capital requirements. 

Real Estate Loans vs Other Types of Loans

Loans, depending on their purpose, will have different features. Some loans  offer a higher loan amount than others, and such is the case with real estate loans  compared to other types of loans. 

Below is a general idea of the loan features across different loan products:

Based on the table above, borrowers would already have an idea which type of loan they should avail. 

Real estate loans provide a higher loanable amount because of the total contract price of the property, the length of the repayment period, and the presence of collateral which is  the property itself. 

Loan Limit 

The maximum loan amount a person can apply for a real estate loan will ultimately depend on the value of the property. Ideally, banks and other financial institutions approve a loan amount that is equivalent to 80% of the appraised value of the property.

For example, a pre-selling condominium unit located in a prime area in the city is valued at Php4,000,000 of which, 20% has already been paid (Php800,000). So the amount that will be financed is 80% which is equivalent to Php3,200,000. This amount will be the basis of financing where the interest rate is applied and the basis of the monthly amortizations over the term of the loan. 

Terms and Conditions

When applying for a real estate loan, there are loan features attached to the loan apart from the repayment of the principal amount. Borrowers must be aware of the following:

Interest Rate

The interest rate or the cost of borrowing is charged on the principal amount expressed in terms of rates or percentages. Typically, mortgage loans have a fixing period – the time when the interest rates are going to be the same for the term agreed upon.  

The interest rate for mortgage loans in the Philippines can be as low as 5.19% per month. 

Loan Repayment Term

The repayment term is the agreed period for which the loan should be repaid. For real estate loans, the repayment period is up to 25 years if financed by the bank or up to 30 years if applied through a Pag-IBIG housing loan. 

Appraisal Fees 

Real estate loans require that collaterals be appraised in order to determine the maximum loan value to be extended to the borrower. Depending on the location (within Metro Manila or outside Metro Manila), the appraisal fees will differ. For example, appraisal fees within Metro Manila are charged at Php3,500 and for that outside, it will be charged at Php4,500.

Repayment Methods

There are many options for borrowers to pay back the loan.Due to the length of repayment, the most common repayment options are Auto Debit Arrangement (ADA) and Post-dated Checks (PDCs). Other repayment methods would be electronic transfer and over-the-counter payments. 

Late Payment Fees

Some people face financial difficulties years into paying their mortgage. With this type of loan, banks do not immediately foreclose a loan when a single payment is missed because of the presence of the collateral. However, they do give a timeframe within which all due payments should be paid plus the late payment fee charged. Some banks charge 2% per day of the unpaid portion of the amortization plus the interest charges on the past due payments. 

Possibilities of Foreclosure

Foreclosure is a lengthy process. Banks and other financial institutions must first exhaust all means necessary to collect payment from the borrower. During the pandemic, the Bayanihan Act was implemented which allowed borrowers a grace period from paying off their loans while the act was in effect. This prevented financial institutions to enforce collections and foreclose properties. 

However, if the bank has already exhausted all its efforts in collecting past due payments and has not received any response and payment from the borrower, they can foreclose the property put up as collateral.  

Real Estate Loan For A Business Client

A business client is eligible to apply for a real estate loan when required for the growth of the business and the need for expansion such as acquiring properties. Security Bank is one of the financial institutions that offer real estate loans for businesses. The features of their loan product include the following:

Loan Amount: Php1,000,000 to Php20,000,000

Loan Term: up to 20 years (depending on the bank’s evaluation)

Interest Rate: 8.5% to 9.5% if below Php5M, 8% to 90% if more than Php5M (fixing period of up to 10 years)

Acceptable Collaterals

• Residential Properties
• Commercial Properties
• Mixed-use Properties
• Hold-out Deposit

Eligibility

• Must be a business registered with the Securities and Exchange Commission (SEC) or the Department of Trade and Industry (DTI).
• The business must be registered as either a Sole Proprietor, Partnership, or Corporation. 
• Must be operating for at least 3 years. 
• Must show profitability in the operations. 
• On a case-to-case basis, startup businesses that have been operating for less than 3 years may be accepted. 

Why Businesses Should Consider a Real Estate Loan

Reserve the cash for other expansion requirements 

Cash is king when it comes to businesses mainly because of the daily operations where they need to maintain liquidity at all times. Additionally, when a firm expands, it is not only through the acquisition of the property but also in the expansion of assets, personnel, and other working capital requirements. Real estate requires a large cash outflow which the business can opt to acquire through financing and pay throughout an agreed term period. 

Ideal for business expansion

When other firms expand, they would rather enter into a lease agreement with lessors. However, this poses a problem especially if the lease agreement is of a fixed term. Upon each renewal, the terms of the lease change. On the other hand, if a firm enters into a long-term lease agreement, it will be able to lock in the price. The only problem is that the cost of the lease is as high as if the property itself is acquired and in this case, it is better to acquire a real estate property. 

From the perspective of the business, their assets increase because of the acquisition instead of recording expenses each year, if they were to lease. 

Flexible Payment Period

Businesses in the Philippines can choose the repayment term that works best for their business cash flow. The repayment periods available are from five years up to 20 years, with an option of settling the loan amount earlier than the maturity of the loan. 

Real Estate Loan Thru Pag-IBIG

One of the most preferred real estate loan options or housing options of Filipinos is through Pag-IBIG because of its lower interest rate and longer repayment option. The Pag-IBIG fund, also called the Home Development Mutual Fund (HDMF), was established to provide an avenue for Filipinos to save money and also to offer an affordable shelter financing option.

Purpose of Loan

The purpose of applying for a Pag-IBIG Housing Loan can be any of the following:

• To purchase a developed residential lot or adjoining residential lots not to exceed 1,000 sqm. 
• To purchase a residential house and lot, condominium unit, or townhouse
  • Brand new units or pre-owned
  • Property mortgaged with Pag-IBIG Fund
  • Adjoining units of residential house and lot, townhouse, rowhouses, or condominium units
• Home improvement
• Completion of the construction of a residential unit on a residential lot either owned by the borrower or a relative of the borrower
• Refinancing of existing housing loan provided that all payments are up to date

Loan Features

Loan Amount: up to Php6,000,000

Interest Rate:

Eligibility

For Filipinos to be able to qualify for a housing loan, the following criteria must be met:

• Has made 24 consecutive months of contributions and is an active member. 
• Should not be more than 65 years old at the time of application and not more than 70 years old when the loan matures. 
• The borrower has the legal capacity to acquire real property. 
• Has no history of any Pag-IBIG loan foreclosures, cancellations, buybacks, or voluntarily surrendered. 
• Updated payment if with an existing housing loan or short-term loan (STL). 

Requirements

Borrower

• Duly filled application form with the recent ID of the borrower and co-maker (if any)
• Proof of Income
• Valid ID for the following:
  • Borrower and spouse
  • Co-maker and spouse
  • Seller and spouse
  • Developer’s Authorized Representative and Attorney-In-Fact (if applicable)

Seller 

• Transfer of Certificate of Title
• TCT of the land and Condominium Certificate of Title (CCT) for Condominium Units
• Tax Declaration (updated) for House and Lot, and Updated Real Estate Tax Receipt
• Vicinity Map/Sketch Map leading to the Property 

Payment Methods

There are many payment methods accepted in the payment of Pag-IBIG Housing Loan. The repayments can be done through the following methods:

• Salary Deduction
• Post-dated Checks (PDCs)
• Payment to Accredited Developers with Collection Servicing Agreement (CSA)
• Auto Debit Arrangements (ADA)
• Accredited Collection Partners (Local Remittance, Overseas Remittance)

Banks That Offer Real Estate or Mortgage Loans

Here are some of the banks that offer real estate loans, specifically a purchase of a house and lot unit, in the Philippines along with their loan features: 

Things to consider Before Applying a Real Estate Loan

 Applying for a mortgage isn’t an overnight decision. It takes serious deliberation with your spouse or your family because of the long-term commitment required in repayments. 

Check Your Budget

Choosing the type of unit that you need to acquire has a lot to do with your budget and the family’s needs. For a single person, it will make sense to purchase a condominium unit, while for a young family, a house and lot unit might make more sense. Those who prefer living away from the hustle and bustle of the city would settle with townhouses. 

Once all that is determined, one can choose the ideal property to acquire that fits the borrower’s budget. Because it will take years to pay, one must be decided on the property and read the fine print before signing anything.

Commit to a Repayment Period You are Comfortable With

This is connected to a borrower’s budget. One must only decide to commit to a repayment period that he or she is comfortable paying. For example, a person who might have to send kids to school in five years’ time will have a hard time paying the monthly amortizations within a ten-year period with their salary. Instead, it will be beneficial for the person to commit to 15 or 20 years of loan repayment. 

If a person is more comfortable with a 30-year repayment period offered by the Pag-IBIG Fund, he or she may also go ahead with it and lessen the burden of paying a higher monthly loan repayment. 

Compare Different Loan Features and Choose What is Best Suited for Your Needs

The borrower must carefully weigh the different offers of financial institutions or government agencies. Some banks offer better terms than others while in some cases, a real estate loan offered by government agencies is better than banks. At the end of the day, the borrower must proceed to what is best suited for their needs and their budget. 

Plan Your Application in Advance

The whole application process, from the preparation of the required documents from the borrower to the credit evaluation and then approval will take, in some cases, more than a month. By the time the downpayment has been completely paid, there is little time that a borrower has to get approved for a loan. 

Using Any Pre-Owned Asset or Parent’s Asset as Collateral for a Mortgage

It is possible to have a borrower’s existing property as collateral to get approved for a real estate loan. However, the borrower must know that the amount of loan to be approved will be based on the property’s appraised value up to a certain percentage. 

In the cases of a new house and lot, condominium unit, or townhouses, the property automatically becomes the collateral. For the other type of real estate loans such as home equity loans, lot acquisition, etc., the borrower has the option of putting up a pre-owned asset as collateral. 

However, putting up your parents’ assets as collateral is a different story, especially if applying for a real estate loan through the bank. The requirement is always that the collateral put up for the loan must be that which the borrower owns. This is because in case a borrower defaults on the payment and a settlement is needed, the bank will be able to attach the property to a foreclosure proceeding initiated by the bank. But if the parent only acts as a guarantor, the asset of the parent may be used as a form of security. 

Documents Required

The typical documents required in applying for a real estate loan are the following:

• Copy of Transfer Certificate of Title (TCT) and Tax Declaration (Land and Improvement)
• Bill of Materials (Construction)
• Documents for employed applicants:
  • Certificate of Employment
  • Latest Income Tax Return (ITR)
  • Two government-issued IDs
  • Tax Identification Number (TIN)
  • Utility bill

• Documents for self-employed applicants:
  • DTI Business Registration Certificate
  • Audited financial statements
  • Income Tax Return
  • Bank statements

• Collateral
  • Photocopy of Title
  • Lot Plan with Vicinity Map
  • Photocopy of Tax Declaration

• Other documents as the lender may deem fit.

Conclusion

Real estate loans or housing loans are viable options for Filipinos who want to purchase real estate property, whether a new home, condominium unit, prime lots or even expanding their land as part of the business operations. 

However, availing of a housing loan is a major financial decision that’s why it’s important to compare what banks and lenders offer before signing the fine print. Above all, educating yourself about the pros and cons of this type of loan helps you make an informed financial decision at the end of the day.