Bank Loans and PAG-IBIG Home Loans
Home Loan Calculator:
What is the total maximum loanable amount?
The maximum loanable amount would be about 70% - 80% of the total assessed value of the house and lot.
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What is a Fixing Period?
Also known as the repricing period, tenor, cycle, or fixing period, it refers to the time frame during which the fixed interest rate will apply.
What Fixing Period should I choose?
For example, if you choose a 1-year fixing period, this means the interest rate will not change within 1 year. After 1 year, interest rates will be computed again based on Banko Sentral ng Pilipinas. The interest rate mostly depends on the Law of Supply and Demand. Higher demand for loans and lower availability of loans would mean higher interest rates. Choosing the fixing period to apply is a personal choice as it is difficult to predict if interest rates increase or decrease. Below is the 25-year history of the interest rates from Banko Sentral ng Pilipinas for your analysis:
Note when using the Home Loan Calculator:
If you are using a smart phone, lightly touch the yellow box to edit "LOAN AMOUNT" until keyboard appears (about 3 tries). Upon entering the "LOAN AMOUNT", lightly touch on "Monthly Bank Payments" for results to appear. If changing the interest rate, don't forget to add % sign.
Our opinion: It is our opinion and observation that in every Presidential election in the years 1998, 2004, 2010, 2016, and 2022, and also during the early months of the Covid Pandemic, interest rates seem to drop. During times of uncertainty, the demand for loans seems to drop since investors adopt a "wait and see" attitude. It is also our observation that interest rates increase when inflation rates increase since the demand for loans also increases due to the increase in the cost of goods and services. Please note that this is only our opinion since it is difficult to predict interest rates as there are too many factors involved. Even international events and natural disasters have an effect on interest rates.
Do I need any Cash or Equity even though I loaned from the bank already? The following are things the bank won't tell you.
Suppose your project costs 3.5 million pesos, and the bank approves your loan application for the same amount. However, it doesn't mean that the entire sum will be disbursed to you immediately. Instead, the bank will release the funds in tranches. Additionally, the bank won't inform you that you need an additional 40% cash or equity to complete the project. It may seem perplexing because you took out a loan to secure funds, but now you need to provide more money to obtain the loan amount from the bank. To clarify this further, consider the following 3.5 million peso loan example:
Loan Amount: 3,500,000.00 pesos
Project Cost: 3,500,000.00 pesos
Approximate Lot Value: 1,000,000.00 pesos
The first tranche or release of funds from the bank is determined primarily by the value of your lot. This is to ensure that the bank has collateral even if you abandon the construction project. The first tranche typically ranges from 60% to 80% of your lot's value. For the sake of illustration, suppose the bank decides to release 70% of the lot's value as the first tranche.
Therefore, the first tranche would be 700,000.00 pesos, which represents 20% of the project cost.
This is where the first problem arises. To obtain the next tranche of funds, we must have completed 30% of the project. Consequently, we need 30% of the funds to complete 30% of the project. Even if we hasten the project, the 20% of the funds received from the first tranche will not cover 30% of the materials and labor expenses. We require at least 30% of the funds to achieve 30% of the project. Thus, we need 10% cash or equity to obtain the first tranche.
The second issue is the bank's evaluation of the project's progress. The bank wants to ensure that it has the upper hand if you abandon the project. The bank's target completion items for disbursing funds are outlined in the following example:
At the 90% completion mark, you'll notice that all major items are at 100% except for floor finishes at 80%, painting at 85%, electrical at 85%, and plumbing at 85%. While these items make up less than 25% of the total project cost, the other works would already be at 75% if they were completed at 100%. When combined with approximately 20% of the remaining works done (an average of 83% of 25%), the actual accomplishment at the 90% mark would be about 95%. Banks usually under assess by about 5% to have a 5% allowance for any construction defects. Therefore, besides the 10% cash or equity needed to reach each % milestone accomplishment, an additional 5% cash or equity is still required.
The third issue arises with the bank's time to release funds. Banks usually take around 2 weeks to process loan release applications, inspect, assess, approve, release funds, and clear checks. During the two weeks that you wait for the cash to be released, the construction progresses at a rate of approximately 7.5% accomplishment every two weeks. If you don't have 7.5% cash or equity at hand, you would have to stop the construction every time you apply for loan release. If you wish to avoid stopping, you would need about 7.5% cash or equity.
In summary, for the 1st tranche or loan release, we would need 10% because the lot value is not enough to cover the 30% fund required, 5% due to bank's under assessment and 7.5% so we can continue with construction while waiting for the 2 weeks for the banks to release. This would total to about 22.5% cash or equity required for us to get the 1st tranche or loan release. From our PhP3,500,000 project, that would be about PhP787,500 cash or equity needed for us to get the 1st tranche or loan release.
However, the 22.5% is only for the 1st tranche or loan release. Although banks release in tranches for the 30%, 60% and 90% mark, the release for each mark is not equal. The final release or the 90% mark is largest tranche or loan release. With just about 62.5% of total funds released by the bank, the bank will require you to achieve the 90% mark. That would mean you would need atleast 27.5% of cash or equity due to the disparity. This does not include the bank's 5% under assessment and the 7.5% needed so construction could go on while waiting for the bank to release. This means we would need about 40% cash or equity for us to get the final tranche or loan release from the bank. From our PhP3,500,000 project, that would be about PhP1,400,000 cash or equity needed for us to get the final tranche or loan release. The final tranche or loan release is usually almost equal to the cash or equity needed for us to get the final tranche or loan release. This is what we mean when we say you borrowed money since you need money but now you need money so the bank can release you money.
To summarize, when building using a home loan from the bank, it is advisable to have a minimum of 40% cash or equity prepared, as banks release funds in tranches, under assess, and there is a need for funds while waiting for the bank to release the next tranche, which typically takes about 2 weeks.