Mortgage Interest Rates are Rising, What Now?

Mortgage interest rates are rising. According to the Bangko Sentral ng Pilipinas, the Residential Real Estate Price Index rose up to 6.5% year-on-year in the 3rd quarter of 2022. This sharp increase will have an impact on the housing market. To have a deeper understanding of the issue, let us tackle what mortgages are, the causes of the rising mortgage interest rates, their possible effects, and some tips that will help first-time homeowners.

What is a Mortgage?

A mortgage, also known as a housing loan, is a loan people (borrowers) take to buy or maintain a house, land, or any type of real property. The borrower agrees to pay a lender over an agreed period of time in a series of regular payments.

Regular mortgage payments are divided into the principal amount and the interest. The principal amount refers to the original sum of money borrowed from the lender. On the other hand, interest is a proportion of a loan, usually a small percentage, that is charged by the lender.

Mortgages make it possible for people to buy and own a house without paying the full price upfront.

What are the Types of Mortgages in the Philippines?

There are two types of mortgages in the Philippines: Conventional and Flexible. Borrowers can choose between the two depending on their preference.

•         Conventional Loan. Has fixed payments over a particular period of time.
•         Flexible Loan. You can control your interest rate depending on the amount of your deposit.

What’s Causing the Increasing Interest Rates on Your Mortgage?

Experts believe that the combination of higher prices of imported raw materials, higher construction costs, total Philippine offshore gaming operators (POGO) exodus, etc caused the increase in mortgage interest rates.

What are the Effects of Increasing Interest Rates on your Mortgage?

Colliers said that the rising interest rates would affect the residential market, especially mortgage rates. ”The rising construction costs due to higher prices of imported raw materials are also likely to stifle launches in the pre-selling market,” Colliers said.

Colliers pointed out that there is a 7.8% increase in bank mortgage rates in the 3rd quarter from the previous quarter’s 7.3% and 7.4% in the same period of 2021. Because of that, the firm encourages investors to “actively monitor interest and mortgage rates.”

“In our view, the rising interest and mortgage rates, as well as the increasing prices of construction materials, likely tempered condominium launches in 2022,” Colliers research director Joey Bondoc stated. Despite the challenges, Colliers said that the real estate sector will benefit from the Philippines’ 7.6% economic growth in 2022. Research director Joey Bondoc stated that the momentum brought by the economic growth will carry over to 2023.

Cushman & Wakefield, a leading global real estate services firm, have a different view of the situation. The firm said that the real estate market will slow down. The firm stated that the downtrend is due to the PH government’s aggressive contradictory monetary policy stance. “The aggressive contradictory monetary policy stance by the BSP, which is in sync with other central banks, prompted by the rallying prices, may slow down the global recovery, as well as delay the expected real estate market recovery in the short term as local and global locators assess the elevated uncertainties,” the firm said.

“Households forming demand in the affordable and mid-market housing segment are expected to be impacted by the real income squeezes due to high inflation levels in the short-term to mid-term”, Cushman & Wakefield added.

On top of all that, the increase in interest rates can temper the demand for houses in the foreseeable future.

Mortgage Tips for First-timers

Purchasing a home is a big financial step for anyone. Even with the help of mortgages, you will still pay a lot of money for a long time, especially during times like this when interest rates are high. This is especially hard for beginners with little know-how in purchasing a house. For that, here are mortgage tips for beginners.

• Have a stable source of income. Paying mortgages takes a long time and a lot of money which is why you need to have a stable source of income to afford your monthly payments.
• Start saving. Even though a bank or other financial entity can approve your mortgage, you will still need to come up with a down payment. Make sure you save enough money before applying for a mortgage.
• Build an emergency fund. Owning a house entails various unexpected maintenance costs. Make sure you have at least 3-6 months’ worth of your monthly expenses as an emergency fund.
• Get a good credit score. Having a good credit score will help in getting your mortgage applications approved.
• Find a good bank. A good bank will not only help you get your dream house but also give you the best terms. Banks like BPI, Metrobank, PNB, EastWest, RCBC, etc are among the best banks in the country where you can get a mortgage.
• Prepare the necessary documents. Financial institutions may reject your application if you have incomplete documents.
• Don’t bite more than you can chew. Make sure that you can afford the mortgage you applied for. Make sure your monthly payments only take up 28% or below of your total monthly earnings.

Many current events are causing an increase in mortgage interest rates. Price increases in raw materials, logistical challenges, and other factors contributed to the increased rates. Fortunately for many mortgagors, they can weather the storm by being financially prudent. However, the possible decrease in demand may negatively affect construction businesses.

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Sources: 

• Royandoyan, R. (2022, December 29). Home prices sustain modest growth in Q3, but rising interest rates to cap ascent. Philstar.com. https://www.philstar.com/business/2022/12/29/2234039/home-prices-sustain-modest-growth-q3-rising-interest-rates-cap-ascent
• Talavera, C. (2022, November 1). Rising interest rates to impact housing market. Philstar.com. https://www.philstar.com/business/2022/11/02/2220806/rising-interest-rates-impact-housing-market
• Salting, E. P. (2023, February 18). Colliers: Property sector to benefit from PH growth. The Manila Times. https://www.manilatimes.net/2023/02/18/business/top-business/colliers-property-sector-to-benefit-from-ph-growth/1879174