Which bank offers the cheapest housing loan product in the Philippines?
Check out our table below for a comparative summary showing the interest rates charged by banks for home loans in the Philippines. The rates provided below are for a P1 million housing loan payable in 10 years.
The interest rate may be fixed for a certain number of years chosen by the borrower. After the fixing period, the interest rate is “repriced”.
Home Loan Interest Rates in the Philippines
– As of October 2014
|Bank||1 Year||2 Years||3 Year||5 Years||10 Years|
What is “interest rate repricing”?
“Repricing” means new interest rates may be charged on an existing home loan.
A 10-year loan with a 3-year repricing option, for example, means that the interest rate charged on the loan will be fixed for three years, which means the borrower is required to pay a fixed amount of monthly amortization for three years.
At the end of the third year, however, the loan is repriced and, considering various market conditions, a new interest rate may be charged on the loan. Usually the new interest rate, which is subject to the “prevailing market rate,” is higher than the initial interest rate.
In times of economic crisis, interest rates may fluctuate uncontrollably, causing significant upticks in interest rates. One bank manager I was chatting a few weeks ago told me that twenty years ago, loan interest rates in the Philippines reached a whopping 20% per annum!
Example of monthly amortization computation
Given this high interest rate, a 10-year, P1 million housing loan would have an amortization of P19,325.57 per month — with around P16,000 of this — being used to pay exclusively for interest.
In contrast a 10-year, P1 million loan charged a fixed 8% interest for 10 years would only require the borrower to pay monthly amortization of P12,132.76.
A 20%-per-annum environment might not occur again in the short run, but borrowers can protect themselves by getting a fixed interest rate for a longer period if they are not ready for such fluctuations.
Impact of interest rate repricing
By locking in a longer, fixed interest rate, 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 pay only P10,977.00 monthly amortization on a P1-million, 10-year loan. But if the repricing period is every year and the prevailing market rate increased from last year, the borrower will have to face higher interest rates and, ultimately, higher monthly amortization.
If, on the second year, the interest rate 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 payments. 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.
So here’s our tip: Don’t be lured by super-low interest rates that are subject to annual repricing. This is a marketing tactic used by banks in order to hook you as a customer. It is possible that after the fixing period, the interest rate is repriced and changed to a significantly higher rate that you may not be prepared for.
Choose a repricing option you are comfortable with, given your future cash flow and expected monetary requirements. We suggest you lock in a relatively higher but fixed interest rate for a longer period of time so you can have peace of mind regarding your monthly amortization.
Source: Official websites and inquiries with Philippine banks