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Rate shopping for a housing loan

Interest rates are inching up, but its still a good time to apply for a housing loan. But look beyond just the rate. Theres more to a home mortgage than meets the eye. By Heinz Bulos

or many people, their home mortgage represents their single biggest expenditure in their entire lives. Although they can transfer their loans to another institution, its always a good idea to start things right. First of all, when they get a housing loan, its really a major financial decision for them. The loan amortization may comprise maybe 30-40% of their monthly expenses. Given this, its going to affect their personal finances over the long term. They should therefore look for a provider carefully, and they should make their decision wisely, says Elizabeth Latinazo, Vice President for Bank Marketing-Personal Financial Services for The Hongkong and Shanghai Banking Corporation (HSBC). Its even harder now that there are just many to choose from. In the banking industry, practically all commercial banks are offering housing loan products. Gary Vargas, Vice President for Consumer Finance of Equitable PCI Bank, says, Now its very competitive, whereas 7-8 years ago, it was a contest between PCI and BPI. But now, the market is open. We have to be innovative to get a better slice of the market. Before it used to be a plain vanilla housing loan, says Ma. Lourdes Abellar, Vice President for the Home Financing Division of the Consumer Lending Group of the Metropolitan Bank & Trust Company (Metrobank), but now you have to be very creative as far as the product and promo youd be offering. Alex Ilagan, Senior Vice President and

Retail Credit Sector Head at East West Banking Corporation (East West Bank), explains, Theres not a lot of new projects marketed, its mostly in the middle market, unlike a few years ago. Theres a lot of competition for a very small market at the moment. With so much competition come too many options for basically a commodity product. The products are the same. They differ only in the interest rate. And of course, service, says Vargas. But that shouldnt deter you from buying your dream house, residential lot, or condo unit, and financing it with a housing loan. Vargas explains, At the peak of the housing market, in 1995-1996, interest rates then were at 16%. But now its at 10.5%, 11%, so nows the time to borrow. In fact, when the Asian financial crisis hit, rates went up as high as 30%. Now, interest rates are so low and remain relatively stable youd be a fool to wait it out. Much as interest rates remain very important, there are other factors you have to consider when shopping for a home mortgage. Heres what you need to look at: Interest rate Okay, this is really what you want to know about. Its always been the rate, says Abellar. Thats always the first question home buyers ask. The lower the rate, the lower the amortization you pay every month. A borrower would inquire from any bank, scout around. Or a borrower may apply with two banks simultaneously. Theyll get the one that offers

the lowest rate and cheaper fee. Vargas explains, People are rate shoppers. Theyre educated now when it comes to housing loans. They go to the bank that offers them the lowest rate. Latinazo, however, points out, I think thats how they start. Its the easiest way of looking at the exercise of canvassing for the best provider. Once they narrow it down to say two or three, then thats probably when they look closely. But at the start, it boils down on the rate. As of press time, average rates are at 10%11.5%, which already includes the 10% VAT imposed on banks, and is about to be repealed after Congress passed a law exempting banks and professionals from VAT. East West Bank, for instance, is at the high side of the range of 11.5%. Take out VAT, its about 11.36%, says Ilagan. Before VAT, HSBC offers rates as low as 9.25% which is repriced quarterly. But were not the price leader, explains Latinazo. BPI remains the price leader as well as the market leader, having been the pioneer in offering housing loans since the sixties. As such, a lot of people have been accustomed to getting their home mortgage from BPI. But now, its fair game, with everyone out to eat BPIs lunch. East West Bank only recently offered a limited promo of 6% interest rate for the first year of the loan. The promotion offers a guaranteed one-year guaranteed interest rate of 6%, so thats the lowest right now in the market. The others
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offer between 10%-11.5%. You cant find anything lower than 6%, says Ilagan. Its a risk we had to take. We had to bite the bullet because we wanted to attract the market. Its really a dog-eat-dog out there. Vargas explains, If your funding cost will allow you to compete head on, then you compete head on. But if you cant, you compete through better services. Repricing and rate protection Its not just the rate you should be looking at. A very low rate could just be a promo rate, like what East West Bank offered. Or it could be a rate for quarterly repricing, which only HSBC has. Says Latinazo, At HSBC for example, we offer interest rates that are fixed from quarterly to up to five years. We are the only bank that has a quarterly repricing option. Its quite popular because when your rate is fixed for three months, thats usually the lowest rate among the options available, and that really translates to low amortizations for you. But we always advise people that even if that is so, theres always the risk that after three months after youre going to reprice it, rates are going to change. Our frontliners are advised to explain well to the prospect that there are inherent risks to quarterly pricing and of course what are the benefits if youre five-year fixed or three-year fixed. It really depends on that persons view on how interest rates are going to behave in the future. So, check the fine print. Banks offer a range of interest rates, depending on how often the loan is repriced. Usually, its yearly repricing, which is good for the banks, as theyre not stuck with a rate. Its also good for borrowers, especially if interest rates are fairly stable, or better yet, declining. But there are also rates that are fixed for two, three, four, or five years. The longer the rates are fixed, the higher the rates are, to compensate for greater uncertainty. Abellar says, We have fixed rates from 1 to 5 years. If you want 5-year fixed, well give it to you at 13.5%. If you want 3-year fixed, its 11.75%. East West Bank went as far as fixing the amortization for the entire duration of the loan, which is unlike all banks who reprice either on a yearly basis or up to the first three years. At most they will guarantee three years or in very few cases
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five years, explains Ilagan. We have this feature we call Customer Protect. You can fix your amortization for the entire term of your loan. Lets say you get a 10-year housing loan, we can already pre-compute your amortization for the next 120 months. Its not a guaranteed amount every year, naturally the rates will be going up, because as you go out further, theres a higher risk for us. He adds, You can already anticipate how much youll be paying every month for the next 10 years. You can do your cash flow schedule already, so there are no surprises. The problem with most housing loans, when theres a repricing, sometimes you get surprised that suddenly next month youre going to pay a big amount. Sometimes youre not ready. Even if the rates will go up to 20% a year, well take the risk that whatever rate we give you for the next 10 years is fixed. Ilagan points out that this is an option for their customers, as they also offer yearly repricing. But for those who want to eliminate all uncertainties and value that fixed schedule, this is as predictable as you can get. Ilagan admits its a risky move on their part, because youll never know where the interest rate will go. Its very difficult to predict, there are so many factors to influence that. Thats the reason most banks prefer a yearly repricing because that protects them from wild fluctuations. In our case, we were willing to take the risk. But theres also a price to that, thats why if you ask what the average is, its high. But its reasonable, youre talking about a ten-year time frame, anything can happen in ten years. If you want to continue to pay your 10% but want some assurance you wont be paying double that after this years elections (depending on who wins, of course), theres a twist to the fixed rate offer - rate protection. Vargas explains Equitable PCIs offer: We have this scheme wherein you get a forward cover on your rate, say maximum of 15% plus VAT, over a five-year period. Your interest rate wont go over 15%, but you reprice yearly. So your pricing is based on the annual rate of the bank but youre guaranteed it wont exceed 15%. But again, theres a catch. You have to pay a premium, explains Vargas. So if your rate is 10.5%, VAT inclusive, usually theres a premium that ranges from 0.5% to 1%. But youre

guaranteed. So if interest rates go up to 20%, youre still safe at 15%. You have peace of mind. If your loan is P1 million, thats P833 a month additional. Our five-year fixing is 14%, so Id rather go here, since I wont exceed 15%. Metrobank has a similar offer. One product that is being offered in the market that is different is the Rate Protect, wherein the buyer enjoys rate protection, because theres a cap, explains Abellar. For example the rate right now, most banks are offering 10.5% for one year. But what we would be offering them is if they get a loan from us under Rate Protect, we will offer a cap of 16.5%, meaning their loan will be repriced yearly, based on the prevailing market rate but they are assured that we will not go beyond 16.5%, thats already inclusive of VAT. If you remove the VAT, thats actually 15%. The range would be a floor of 10% and a cap of 15%. Well reprice it on a yearly basis so theyll get to enjoy the yearly repricing and the protection against rising interest rates. Thats for five years. But Metrobank goes even further: We do have the Rate Protect Plus, which is an extension of another 5 years, its like a 10-year protection, Abellar points out. Given the fact that rates may increase next year, this is one product that is very marketable. The first 5 years is 10% [floor] and 15% [ceiling], the next 5 years is 11% [floor] and 16% [ceiling]. Thats exclusive of VAT. Once we approve your loan, you have to tell us already if you would want to commit for the next 5 years. Its automatic, if you say you want the Rate Protect, well give it to you, at no cost except for the interest rate. Another catch though: If you decide, Okay, book me for another 5 years, theres a commitment fee to that, which is 1% of the loan amount, adds Abellar. A lot of borrowers have been very interested in that because they see the rates to move higher. And the 1% commitment fee can be paid in 12 months. Its not a one-time thing. So, should you fix your rate for 3 or 5 years? Or go for the rate protection scheme? Abellar replies, I would still go for the yearly repricing. Theyre not locked in. We also have the fixed interest rate for 5 years. But year one you get 13.5%, so you dont enjoy the fluctuation. So far, for the past 2-3 years, the

rates have been quite stable. Theres yet another way to save on the cost of borrowing, aside from yearly repricing or setting a ceiling. The number of times you pay can save you a lot of money. Latinazo explains, They should look if there are any money-saving features in the product. Not many people realize that the HSBC housing loan has a fortnightly repayment option, in which they can pay every two weeks. If they choose that option, they can realize a lot of savings in terms of interest. Because if you pay twice a month, your loan actually gets repaid sooner. So even if you sign up for 15 years, if youre paying every two weeks, your loan can be paid off in 11-12 years. And the three years that you took out of your term mean a lot of interest savings. A few banks offer this scheme. It means less income for them because it translates to a shorter term, and thus lower interest. Latinazo says, Its true, versus a regular loan, the bank will earn less. But we have to understand the market out there has different needs. Most banks offer only monthly payments or every payroll period. Under a fortnightly repayment arrangement, you pay every two weeks. So, if your cash flow is predictable, this sounds like a good deal. We want to be able to say to person A, If youre willing to pay every two weeks because your cash flow allows it, then why not?, Latinazo explains. Loan value Theres more to a loan than just the rate, as we keep repeating. In fact, its not just the interest that affects how much youll be paying. Latinazo clarifies, Usually, they would appreciate affordability. When we say affordability, I distinguish that from simply saying that the bank has the lowest rate, because having the lowest rate does not necessarily mean youre the most affordable. So its affordability that you want to relate to your own budget-whats affordable for you may not be affordable to anybody else. And thats loan value, or how much money the bank will give you. That depends on two things - the appraised value of the property and the percentage of appraised value that you can borrow.

In our case, says Ilagan, thats dependent on the appraised value of your property. We give up to 70% of your appraised value. As long as the selling price and the appraised value is very close. Vargas says they lend 70% of the propertys appraised value, but we go up to as much as 80%. We look into the kind of property, the kind of developer, the kind which we think are easily marketable. The location of the property counts much. Try to get the appraised value as high as possible, because the higher it is, the bigger the loan you can get (but the larger your amortization). And that means a smaller equity portion you have to pay upfront. Abellar explains, Rate is a primary consideration, but they would look at the loanable amount, how affordable the monthly amortization will be, the equity requirement. Some of them would go for the lower equity. If this bank is offering a higher rate but in terms of the monthly amortization, its more affordable to the client, the client can sacrifice rate as long as the amortization is lower. That can happen if the equity portion is lower. Vargas says Equitable PCI Bank gives preferential rates. We course it through the developers. Normally, the banks valuation is different from the selling price. Normally its lower. But if you course it through our consumer fi-

nance showroom, you get perks like your appraised value is based on the selling price, so you get a bigger loan, and youll provide lesser equity. But if you go through a normal channel, you can only loan less than 60% of the real value of the property. If you want very little equity, theres another way: Some developers are offering inhouse financing at 90%. They have very high rates, at say 18%-21% and then lower equity requirement and less documents. Youd be surprised that a lot of potential borrowers would opt for in-house financing because of that consideration, Abellar explains. Freebies and promos If your bank throws in a little extra, so much the better. But dont make it your primary consideration. PSBank offered to give back your principal after the end of your term. Many waive application and appraisal fees, which run in the few thousand pesos. Others gave back cash, as much as P100,000. Case in point: Metrobank. Abellar says, We did introduce promos this year, like the P100 thousand with a card. Thats quite a hit. Well give you a hundred thousand, which is already included in your card. It was 2% of your loan amount but maximum of P100 thousand. You get a gold card with P100 thousand.
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As with most promos, theres a restriction. At least in this case, its not that bad. The interest rate is the same. But since were like giving you money, you have to be with us for the next 3 years, Abellar clarifies. But were very transparent. Well tell you the rates will be repriced on a yearly basis based on prevailing rates, and you can always compare our rates with other banks. We have to protect the image and the Metrobank brand. If you want to preterminate or pay off after 3 years, thats fine with us. Another bank offered that scheme also but that bank required you to be with them for 10-15 years. Some gimmicks though have no strings attached whatsoever, like the recent promo of Equitable PCI Bank: We also have our Owna-Home Plus. If you have your purchase of your house financed by us, you automatically can qualify to get an appliance loan of up to P500 thousand, with rates based on your housing loan rate, in excess of your housing loan, up to 5% of the value of your property, payable in 5 years, says Vargas. He adds, If you go to appliance stores, usually you get 0% interest, but payable in six months to one year. This ones five years, at housing loan rates. Bottomline is, read the fine print. Latinazo stresses, We just always emphasize that at the end of the day, you should just look at the real cost to you, whether the offer is really as good, because a fantastic offer most probably has strings attached to it. Just consider the real cost to you and whether there are restrictions or conditions attached. She further explains, HSBCs policy has always been one of transparency. In recent months, we gave away microwaves and refs. That was a very simple promo, you got either appliance automatically as long as your loan was within the given loan amount range. With the basic loan product itself, all features must be transparent, especially where these concern service charges, like pretermination fees or any other fees that may be payable during the term of the loan. The message here is that they should take the time to review and understand the terms and conditions of available home loan products.

Convenience and service There are also factors that are more important to some borrowers, such as convenience and service. Another consideration would be your branch network, says Abellar, in how you entice the market to go to you. Metrobank has an advantage because of the very wide network. Since Metrobank has many branches, its convenient for borrowers to deal with the bank in terms of payment, in terms of getting the loan. Equitable PCI Bank plays up its similar strength. Our basic advantage really is our branch network, we have a wider reach, Vargas points out. Our reach is different with our extensive branch network. Like when it comes to payment, you can pay anywhere. He adds, If I want to pay, where can I pay? If your bank only has 10, 30 branches, and it doesnt have a branch in Valenzuela, and youre from Valenzuela, and the nearest branch is in Quezon City, but Equitable PCI Bank is just nearby, normally thats the clincher. Because we allow the borrowers to file their application through our branches. Thats part of the service. Its the branch manager that takes care of you. Also, size and age often matter, since they translate into trust. Vargas says, We have a very good brand name for our product, we call it Own-a-Home. That product has been there for more than ten years already. Somewhat weve established a brand name. On the other hand, big banks can seem too intimidating and impersonal for some. And some borrowers may feel more comfortable dealing with smaller banks, like East West Bank. Ilagan says some customers that decided to go to them did so because either they find our branch more convenient or the people easier to deal with. Sometimes, they think East West Bank is an easier bank to deal with, not as intimidating as a big bank like BPI or RCBC. He also doesnt think a wide branch network is a major factor. Well of course for conveniences sake, theres a branch nearby, it will be easier. Thats always a consideration. But we found that most of the buyers wouldnt really mind going to the head office to submit all the requirements. When youre buying a house, which you dont normally do very frequently in your lifetime-normally you just do it once, twice in your lifetime-a lot of customers are willing to go out of the way to even

visit our head office. Although we dont require them, they can always go to our branch. It helps if you have a lot of branches but its not a hindrance [if you dont]. How soon you get an approval is likewise important, especially if youve already placed a down payment to your property developer to reserve the unit or lot. Others would tend to put value to the certainty of approval, especially people in the lower end of the market, points out Ilagan. Theyre intimidated by the requirements of the bank. Banks usually require a lot of documents; it creates a lot of uncertainty that they will be disapproved. We just explain to them the process and assure them that its an objective process, theres nothing to be afraid of. In the end, it really comes down to service. Whether you have a few banks or hundreds of them, if the account officer or branch manager youre dealing with isnt helping you at all, then the process really becomes a stressful experience. Buying a house, lot, or residential unit is a big, big decision, and - in extension - so is getting a housing loan. And its a complicated, scary one. Rates be damned, some borrowers will go for a bank that, at that very moment they ask for the rate and a list of requirements, a loan officer takes the time to listen and explain in clear detail and great patience whats needed. HSBC, for instance, tries to make it easier for borrowers to come up with a decision from the myriad of options. Latinazo says, HSBC prides itself in its Home Loan Simulator. Its an advanced software program loaded onto our loan officers laptops. With a few clicks, you can study different scenarios, like if you want to change the loan term or lower the downpayment, how will it change your amortization? The Simulator is a very useful tool to help prospective borrowers decide on the loan scheme that fits their personal financial situation. They are presented with the various options available, and they can study and examine those options first before finalizing. She adds, I think that goes a long way in helping them choose. In the end, its really about whats most important for you and what makes sense for your specific situation. Now that you have an idea what you ought to look for, and youre in the market for a housing loan, its time to take action. Remember, theres more to it than the rate.

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