Things to consider when borrowing from bank to buy a home

There are several factors one needs to consider when buying a home or a property using loans from a bank.

One of the most important considerations is the amount you can borrow to finance the property such as a house and lot or a condominium unit. Most likely, banks will not agree to finance the whole cost of the property.  This is because banks are also required to comply with prudent regulations of the central bank, or the monetary authority.

One term that should be studied is the loan-to-value  (LTV) ratio which refers to the down payment or upfront amount, as a percentage of the value of the property.  Ideally, the ratio should be 30 percent, but banks have become more flexible in recent years to attract more borrowers.

A higher LTV ratio means less cash-out while a lower ratio means a higher out-of-pocket or upfront payment.  The LTV will affect your monthly amortizations, spread over a particular period, normally from five years to 30 years.

The LTV ratio is designed to reduce lending risks. Also called as “margin of financing,” the ratio is expressed as a percentage and calculated by dividing the mortgage or loan amount by the collateral property’s appraised value.  What can be lent out is equivalent to the collateral property’s appraised value multiplied by the LTV ratio.  

Banks determine the LTV ratios based on the borrower’s age, salary, personal and family income, savings, financial capacity and records of payment, as it relates to the bank’s policies.  Young borrowers can avail of higher LTV ratios, because they have many years ahead of them before retirement.

Aside from individual borrowers, developers’ buyers are also given higher ratios because of their established relationships and good credit standing.   Normally, the type of property used as collateral also determines the LTV ratio. Land is usually assigned a lower ratio, in comparison to house and lot, and condominium units which are built-up and ready-for-occupany units.  

On the average, LTV ratios range from 60 percent to 90 percent of the property’s appraisal value or total contract price of the real estate property. If the property is valued at P5 million and given a 70-percent LTV ratio, the buyer’s downpayment would be P1.5 million, and the loanable amount would be P3.5 million.  

Banks also have a way of determining the maximum loanable amount, which is usually three times the borrower’s annual gross income.  If you are earning P500,000 a year, you can qualify for a loan amount of P1.5 million.

If you are married, you can combine your gross income with your espouse.  For example, your husband or wife is also earning P500,00 a year, which brings your combined income to P1 million annually.  Then. you can qualify for a P3-million loan.

Single borrowers can also get co-borrowers such as relatives who can show proof of income and good credit standing to support your loan application. 

Aside from your salary, banks can also look at your other income from business or freelance jobs, as long as you can support them with documents and tax payments.

Another way of determining the loanable amount is the level of monthly amortization, which should not be more than a third of your monthly gross income.

Amortization is the amount that you need to pay regularly to settle your loan over a period.  It includes both principal and interest.  The longer the repayment period, the higher the interest rate.  Different banks have different interest rates, so it would be wise to compare their loan offerings.

It is one of the best times to take out a loan because of the low-interest rate environment.  Interest rates charged by private bank rates range from 5 percent to 12 percent for one to 20 years fixed.

You can visit the websites of banks which offer a mortgage calculator to see the indicative monthly mortgage for a specific loan amount.

One advice is not to overstate your capacity to pay the monthly mortgage.  If you cannot pay the mortgage rate on time and regularly, there is a big chance that the bank will reposses the property and you will lose your investment, including the downpayment you made.

This is why it is important to know the loan terms as well as your capacity to settle your obligations, so that you can maximize the opportunities of owning a property through bank financing.