Looking to buy your first big purchase?
Whether it is a white picket-fenced dream home or a new unit in that high rise condominium, there are two additional considerations that you need to weigh before you take the leap: getting a bank to finance your purchase, or leveraging on the available in-house financing options. In-house financing options are technically not loans. These are extended payment terms with above average interest rates.
Perhaps the best way to initiate your decision-making process is to first understand your current financial capacity. Is your monthly salary enough to pay the required monthly fees? Would you rather make bigger payments per month at a lesser term, say 5 years only? Or are you less liquid financially than you would like to believe? Being honest with yourself about your current finances is critical in making that final decision.
Let’s take a look at the significant differences between the two types of financial assistance you can get.
How They Assess Your Eligibility as a Borrower
Banks are known to be particularly stringent in their loan application processes, requiring a handful of documents that need to be submitted. These documents such as financial statements, Income Tax Return, certificate of employment, pay slips, business registration and valid identification will have to undergo review and investigation.
For employees, you must meet the basic minimum requirements, such as regular employment for the past two years and a gross minimum monthly income of P30,000, to name a few. If you’re self-employed, your business needs to be in operation for at least two years, and with significant profit. Essentially, the documentation will be used to assess and to convince the banks that you are capable of remunerating the money they will loan, plus the additional interest. Your loan approval is contingent on the result of the bank’s review.
In-house financing, on the other hand, does not require that much paperwork outside your certificate of employment or source of income. As such, there is low risk for your loan to get denied. Your down payment, usually 10% to 30% of the total price of the property, is more or less enough of a guarantee for your in-house financing. Because it doesn’t undergo the same rigorous review, in-house financing is relatively “easier” to comply with in comparison to the bank loan application and is also less time consuming.
How They Compute Your Loan’s Interest
Bank loans, for all their strictness during the application process, do provide a lower interest rate for home loans. Ranging from 5% to 12% per annum, the rates provided are also fluid enough to decrease, depending on the economic conditions. There are some bank loans that can offer fixed interest rates for a decided term, ranging from 1 to 5 years, which will be reassessed according to existing rates after the term is completed. However, this also means that rates can increase if the economic environment dictates so.
Although not requiring too much paperwork at the onset, in-house financing actually has a higher interest rate compared to banks. With a range of 14% to 18%, it is significantly greater. But because these rates are fixed, it is also not subject to economic volatility unlike that of the banks.
How they Dictate the Payment Terms
How long are you willing to pay for your mortgage? Do you prefer that the payments be dispersed over a number of years? Or would you rather get it over and done with? Depending on your financial capacity, payment terms for bank and in-house financing can work to your advantage.
The main difference between the two is that bank loans come with longer payment terms. You can opt to pay out the loan amount in as short as 5 years, or as long as 20 years. In-house financing, however, prescribes a shorter period to settle the balance, usually up to 5 years only.
Other Factors to Consider
The process of getting a bank loan can also be an expensive one. During the application, the bank will charge for property appraisal fees, handling fees, notarial and registration fees, among others. Added together, these fees can balloon up to P7,000.
The best way to get the most out of in-house financing is to apply for it during the pre-selling stage of the property. Real estate developers usually provide a significant discount during the pre-selling stage, 30% cheaper than a finished unit, which taken as a whole can create bigger savings for you. But this also means you have to wait years before the unit or property is turned over to you for occupancy.
Irrespective of the financial vehicle you acquire, do not forget that you should only invest in reputable developers to ensure quality property. It is your dream home, after all!
Which financing option do you prefer? Tell us in the comments!