Now is a great time for us Filipinos to finally become homeowners. The economy, despite easing slightly compared with 2014, is doing well. The job market, buoyed by the business process outsourcing (BPO) sector, stays robust. And the dip in oil prices means more savings for us. (In fact, the government announced that taxi flag down rates would be rolled back this week.)
Real estate developers, too, are taking advantage of Filipinos newfound sense of optimism—and are unveiling a range of residential projects that appeal to buyers with different financial capacities.
However, before jumping into the home-buying bandwagon, you should carefully evaluate your financial standing and capacity to avoid getting into sticky situations later on. Even if you have enough cash for downpayment (ideally 10 percent to 20 percent of a property’s purchase price) and a bank or lender has already approved you for a housing loan, there are other factors to be considered, such as how much monthly mortgage repayments their income can accommodate.
This is important, because unlike a credit card debt, an auto loan, or a personal loan, which you can pay off in a span of months to about five years, a housing loan could take more than 10 years. Long-term planning here is key.
However, this does not mean that you should put off homeowning, especially if you can already afford to do so now and when interest rates are relatively low.
Below are several tips to make the homeowning ordeal more manageable.
Follow the ‘2.5 rule’
Financial advisors recommend the 2.5 rule for anyone planning to become a homeowner soon. This involves getting your annual income and multiplying it by 2.5. The product is roughly equal to the cost of the property you can afford. For example, if you are making Php50,000 a month, your annual income is Php600,000; hence, the property you can afford costs Php1.625 million. If you choose to purchase a house that costs higher, you might find it difficult to afford the monthly mortgage installment.
The 30% rule
The second will be the 30 percent rule, which is not to spend more than 30 percent of your income on paying for housing (either on monthly amortization or rent). Should you decide to buy or rent a house or apartment that will eat more than 30 percent of your monthly pay, you might find it difficult to cope with other expenses, such as food, transportation, and others. Hence, if you make P50,000 per month, you should not spend more than P14,000 on rent or monthly amortization for a housing loan.
To give you an example: For a property worth P1.625 million, paying a deposit or down payment of 20 percent (P325,000) will leave you with Php1.3 million loanable amount from a bank or lender. Using an annual interest rate of 7.5 percent, a fixed-term period of five years, and a loan tenor of 20 years, you will be paying a monthly amortization of P13,091, which is well within your Php14,000 budget.
Have a backup plan
It is always advisable to have a backup plan. Unforeseen events, such as job loss or hospitalization, may cause you to miss monthly housing loan payments, which can lead to hefty penalties. Hence, it is always advisable to have several months’ equivalent of your salary safely stashed. This ensures that in the instance of an unexpected expense, which can happen anytime, you won’t miss your monthly payment obligations—and not lose your home in the process.
You can also use your incremental income such as bonuses and work incentives, which is what professionals who bought their first house before 30 years old recommended in an interview with MoneyMax.ph, instead of spending it on depreciating items such as gadgets. This helped them pay their mortgage faster and served as a backup during financial downtime.
Finally, owning a home also comes with other expenses. During purchase, you need to put aside cash for documentary stamps tax, transfer tax, registration fee, notarial fee, and loan fees. If you decide to buy a condominium, there are also fees that you need to sort out (the amount of which corresponds to the size of the property you bought). In addition, banks also require mortgage life insurance (or mortgage redemption insurance). This ensures that should the principal borrower pass away or become permanently disabled, his or her family won’t lose the house.
Although following either of these rules will give you a good idea of how much you can afford, these will only serve as a general guide. It is advisable for would-be homebuyers to consult with licensed brokers, accountants, loan officers, or even lawyers. Still, nothing beats the experts’ advice.
Rodel Ambas is the Head of Content and Research of Lamudi Philippines, a global real estate website launched in 2013 and is present in 34 countries in the emerging markets. Together, the Lamudi network has more than 800,000 real estate listings.