Some of you who have been reading with me on my ten-plus year journey to the Philippines will remember I have long been known as a “Rent vs. Buy” guy. The way the numbers came out when I moved to the Philippines full-time, back in 2006, just always worked out showing it was much more cost effective to rent our home rather than purchase it.
I really don’t see much changed today, even though the prospects of getting home financing are much more attractive today than they were then.
Those of you who haven’t been through this little exercise would really benefit by reading (thoroughly) this article:
and making sure you also “run the numbers” for any rent or own situation you might be thinking about. Trust me, it’s illuminating … especially if you’re an American, because you have been literally “brainwashed” since elementary school days you just “know” that it is ALWAYS cheaper in the long run to buy rather than “waste your money” on renting.
It Just Ain’t Necessarily So, Folks
You should also read this article by Bob back a few years ago, and run some sample numbers there. IIRC, some reader even called Bob something like “dumb” or “stupid” for living in a very nice home, which he rents rather than saddle himself with who knows how many years of debt to buy. See: Why choose to rent in the Philippines Read it with an open mind rather than a pre-conceived notion and you may gain some understanding about how things actually work here in the Philippines.
But now that I’ve used up nearly 300 words telling you the many reasons it’s not a “slam dunk” to buy instead of rent, I need to make a “full disclosure” statement.
I Not Only Bought My Rental House 3 Years Ago, I’m Now Rebuilding It From the Ground Up!
Yep, it’s true. A little over 3 years ago, I bought (rather my wife bought, with my name also on the tittle) the little almost square hollow block little “quatro-kantos” (Philippine slang for a four-sided (four-cornered) “hip” roof, very common (and very wind-resistant) here in our little corner of Luzon) 3 bedroom, one bath house we had rented from a Filipino couple (now both American citizens), who live in Chicago and wanted cash for tuition for their daughter’s medical school tuition.
I believe we could have just kept paying the P 7,000 a month rent for as long as we wanted to. It wasn’t a case of the landlord trying to force us out … but the price seemed right judging by what things were selling for in our neighborhood.
We wanted to make some significant improvements in the house as well … things the landlord was never going to foot the expense for, so we “ponied up a million pesos or so, and borrowed another (nearly) million from our bank, BDO. (BDO Universal Bank)
Bank Loans Here Are a Bit Different Than in the USA
Some significant differences those of you who ever decide to do this will find:
- Banks are SIGNIFICANTY more conservative here. Here in the Philippines there were never bank failures and government bailouts and such in 2008/2009 like the “banksters” that run US banks went through, because Philippines banks just don’t make those sort of “upside down” or “underwater” loans. The idea of buying bonds secured by “toxic loans” makes no sense to a Philippine bank, and it wouldn’t be allowed under the law as well.
- Most loans are for much shorter periods … 3 to five years are common … although longer-term loans are more and more available … but
- Loans are EXPENSIVE. Back in 2010 when we took out our first loan, the best I was able to do was 8.5% (in 2014, we did a bit better, 6.5%)
- 20% cash down is basically the rule. (There are exceptions to every rule, but don’t plan on any zero-percent down deals)
- Unless you deal with a very modern bank like ours, expect to pay your mortgage by sitting down at the loan inception and writing out a “post dated” check for each and every monthly payment and handing them over to the bank before you collect a single peso.
- Not only is this a hassle in itself, but getting a checking account here is very difficult and time consuming, even for a Philippine citizen. Plan at least 6 months.
In our case the loan payments and everything else went swimmingly well. We now own our house outright, with a clean, legitimate title. The loan was fully paid via direct monthly deductions from our joint BDO savings account. Simple, easy, impossible to forget and completely painless (unless you forget to keep money in you account) … but hey, that’s another story.
So Then We Asked For More
As I mentioned earlier our house was one-storey and rather small … and there was only one small bathroom. My wife and I did not want a “Kano Kastle”, but we wanted more than one bath, a much better kitchen, maids quarters and a more American-size master bedroom and at least one decent-size, well-appointed bedroom for guests. Oh yeah, and hot water. 😉
We visited with several architects over several years (we weren’t in a big hurry). It’s pretty amazing how many Philippine businesses who hold themselves out to be architects and builders are not really interested in actually building and selling homes … especially if you tell them you don’t want a big house, and especially if you tell them you want to use bank financing. To me, using a bank is more of a safety factor rather than just getting your finds quicker than you could save up to buy for cash … the bank does things “by the book” and demands the sort of paperwork you would expect to see … proper plans, specification schedules, building permits, legal land surveys, contractors liability insurance, home owners insurance both during the construction and after completions, etc.
You can build a house with almost none of these common owner safeguards, but I myself won’t do so … I actually consider the modest amount of interest we’re paying on our loan as another form of insurance … money well spent in my book.
When You’re Building New (or renovating) The 20% Comes From Up Front
Here’s how a typical loan works … again, everyone’s circumstances may be different, but this seems to be a pretty common guide).
Loan Amount Applied For: 2.8 million Pesos. (the bank will conduct it’s own appraisal of the property and the plans and specs. In my case the bank agreed the land and the rebuilt house would be worth what I applied for)
Loan Amount Approved: 2.24 million Pesos. (80% of the amount approved)
Loan To be Disbursed in Four Payments (often called “tranches”, French for slices of a pie)
Zero Percent Complete: (This is set at 75% of the banks estimate of the bare land. Will be paid immediately after the formal approval process). You can use these funds to get your builder started,but you are almost certain to need to come up with more to get the project up to the bank’s definition of 30% compete, the next “tranches”.
30% Complete: (This tranche will be 1/3 of the approved amount left over after the 0% complete disbursement. The bank will give you a detailed checklist as to what constitutes 30% complete and they will send an inspector to verify when you ask them too pay. Payment comes almost immediately after the inspection … if you pass 😉 ).
60% Complete: (Basically the same procedure as the 30% “milestone”.
90% Complete: Again, about the same as the previous payments, but I haven’t yet reached 90%, so I’ll fill you in later on any different procedures.
After these 4 payments the bank is finished with payments. I can already hear people asking, “But wait, you are only at 90%. What about the last 10%?
How You Spend is Up To You
Well that’s where budgeting and planning come in, friends. The bank is only at risk for 80% of the value of the home, and they have already assured that at least 90% of that value has been completed, so if you used the bank payments to fly to Tahiti first class and buy a new car to go in your new garage? Oh well. The bank can repossess a 90% complete home just as easily as a 100% complete one … so spend wisely.
All the money you are going to get is already in your hands, and their only job for the remaining term of the loan is to collect your monthly payments and make sure you keep the house insured (in their favor) and make sure you pay your taxes until the loan is paid off.
Unlike many US banks, so-called “escrow accounts” are very uncommon here, you’ll get billed by your insurance company and it’s up to you to make the annual payments, pay your annual property taxes, and keep up with any other required home owner obligations.
Once Again I Ran Over My Word Budget
So feel free to ask if there is anything else you want to know about home loans in the Philippines.