Low Housing Loan Interest Rates - How Banks Entice Customers Only to Screw Them Later

Photo Credit: Bill Ward's Brickpile
(Creative Commons)

In my previous post I talked about Pag-IBIG housing loans and their interest rates. My objective was to give a baseline for housing loan rates from Pag-IBIG so that we can compare them with alternatives. This would hopefully help those that are in the process of acquiring a home but can’t appropriately decide how financing will be done.

It’s important to know which financing option can give you the best deal. Some people will only have the opportunity to talk with the real-estate agent who will always promote what benefits him or his company. That’s because he would earn commissions if he gets you to use the developers financing scheme even if it would cost you a lot more.

Home Loan Interest Rate from Banks

As promised, I was able to research the home loan interest rates of some banks in the Philippines. I have summarized their interest rates in a table below. These data came from their websites. There are five banks included in this table - Allied Bank, Bank of the Philippine Islands (BPI), Security Bank, EastWest Bank and HSBC.

You’ll observe that interest rates are dependent on the period. The longer the “repricing period” the higher the interest rate. This is very much unlike what Pag-IBIG offers. The housing loan of Pag-IBIG changes interest rates depending on the amount borrowed. The higher the loan amount the higher the interest rate.

Just by looking at the values from this table, you’ll notice two distinct sets of interest rates. You should see that those from the first three banks are very similar to each other, while those of the last two seem to be similar and significantly lower than the rest.

Repricing Period

Something needs to be said about the repricing period when banks speak of their home loans. It would seem obvious that the shorter this period is the lower the interest rates the banks are willing to give.

The repricing period is the time frame in which the interest rate will be constant. After this duration has passed, the interest rate will change to reflect market changes or for whatever reason the banks want to change it. For example, a housing loan with a term of ten years and a repricing period of a year will have its interest rate change every year ten times during the entire loan term.

Enticing the Customer

An EastWest Bank executive, in a report a few months back, was not ashamed to acknowledge that their low interest rate is a “teaser rate”. They know that this rate is abnormally low to sustain their business but they give it anyway just to entice customers. So really, what you can expect from this rate is a big jump in interest rate after a year so that the bank will earn from your loan.

If you’ve not realized this by the time you took out the loan, it will be an unwelcome surprise later on.

Pag-IBIG vs the Banks

The published interest rates of Allied Bank, BPI and Security Bank home loans seems to be in the same range with Pag-IBIG housing loan. Even so, there are two distinct advantages that Pag-IBIG has over these banks:

1. Loans less than 750K have lower interest rates (at most 7%)
2. Term options are wider up to 30 years constant interest rate (no repricing)

The only advantage a bank loan may have over Pag-IBIG is when you need more than three millions pesos which is the ceiling for their housing loan program. Otherwise, Pag-IBIG will give you the better deal for a housing loan than what commercial banks offer.