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The battle for low housing loan rates in the Philippines is on. In the previous months, I’ve seen a variety of advertisements by local banks aggressively promoting their discounted home loan rates.

Here is a list of housing loan rates offered by Philippine banks.

Home Loan Interest Rates in the Philippines (as of June 2011)

Repricing Period Allied Bank BDO BPI FB* BPI FB** EastWest Bank HSBC Robinsons Bank* Security Bank
1 year 8.50% 7.88% 5.50% 8.75% 5.88% 5.75% 5.88% 8.75%
2 years 9.00%         7.49%   9.50%
3 years 9.50% 9.75% 7.75% 9.75%   7.69%   9.50%
5 years 9.75% 10.00% 8.75% 10.00%   8.99%   10.00%
10 years 11.50% 11.00% 10.00% 11.00%        
15 years 11.50% 11.25% 11.00% 11.25%        
16-25 years   11.50%   11.50%        

Notes:
* BPI FB – promo rates of BPI Family Savings Bank, valid until June 30, 2011
** BPI FB – published interest rates of BPI and BPI Family Savings Bank, before the promo period
*** Promo rate of Robinsons Bank, valid until June 30, 2011; no other fixed interest rates published for longer years

It’s good to see banks fighting it out by driving down interest rates. Customers, however, must be wary of the terms and conditions of the housing loan agreement because the rates offered are usually just promo rates that are subject to repricing after a certain period.

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Shorter repricing period means more volatile interest rates

Repricing means new interest rates can be charged on an existing home loan. A one-year repricing option, for example, means that at the end of the first year, a new interest rate will be charged on the loan. Usually the new interest rate, which is subject to the “prevailing market rate,” is higher than the interest rate initially charged.

This is very risky in times of economic crisis because interest rates can fluctuate uncontrollably. One bank manager I was chatting a few weeks ago told me that twenty years ago, loan interest rates in the Philippines reached 20% per annum. This means a 10-year, P1 million housing loan would have an amortization of P19,325.00 per month, with around P16,000 of this being used to pay only for the interest.

A 20%-per-annum environment might not occur again in the short run, but home loan borrowers must protect themselves by getting a fixed interest rate for a longer period of time if they’re not ready for such fluctuations.

Impact of repricing on monthly amortization

By locking in an interest rate instead of opting for yearly repricing, one can be assured of how much exactly the monthly amortization will be in the coming years.

A borrower, for example, might snatch a low housing rate of 5.75% per annum on the first year and only pay P10,977.00 per month on a P1-million, 10-year loan.

If the repricing period is every year and the prevailing market rate increased from last year, the borrower will be faced with higher interest rates causing the monthly amortization to also increase. If, on the second year, the interest rate charged on the loan has been repriced to 8.00%, the amortization will increase from P10,977.00 to P12,026.00 per month.

On the third year, assuming that the prevailing market rate increased again and the loan rate is repriced to 10.00%, the new monthly amortization is now P13,000.00.

Good for those who are ready for higher monthly amortization. But those who thought that the low monthly amortization they paid on the first year would be the same amount in succeeding years would be surprised that their monthly payment has increased.

Just a tip: Don’t be lured by ultra-low housing loan interest rates that are subject to annual repricing. Choose that only if you believe the market will continue to have low interest rates in the next few years. But if you’re not sure about the interest rate and you’re also not ready for higher monthly payments, better to lock in a relatively higher interest rate for a longer period of time so you can have peace of mind as regards your monthly amortization in the coming years.

Sources: Websites of Philippine banks

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