Planning to get a home loan soon? You might want to do it earlier than planned.
Why? Two things: lower loanable amount and higher interest rates in the future.
To let off steam in the bustling (and to some) soon-to-burst-bubble in the booming real estate and construction sector, BSP is planning to tighten the cap on real estate loans.
In banking parlance, this is cap is usually called loan-to-value ratio (LTV).
Simply put, LTV is how much you can loan as percentage of the collateral value. Industry average is at around 80% so for a collateral with value of PHP1M for example, the maximum loan you can get is up to PHP800K. Some lenders even stretch it to 90% for preferred clients.
Now, you ask where will you get the missing PHP200K to fully purchase / mortgage the desired property? Well, the usual case is that the PHP200K is from your own pocket (or get a clean loan somewhere else) which will be paid as down payment (DP) or customer equity. For some loans, especially pre-sell ones like condominiums, the PHP200K (or whatever DP amount) may also be payable in monthly amortization.
BSP is planning to lower and tighten the LTV cap to 60%, which means future borrowers will have to shell out higher DP at 40%.
This effectively makes the target market for home loans smaller since not everyone can easily afford a 40% DP. This also lessens the pace of bank lending to this collateralized segment since a 40% DP, in case amortized, will take a comparably longer time and turnover compared to amortizing just 20% DP. Maybe twice the number of months needed.
Once this is in place, this will slowdown the activity in real estate loans, which, as BSP hopes, will put some controls and deceleration to avoid a property bubble, which has far worse consequences to existing and future real estate properties. Expected implementation date is two years from the time the BSP policy is formalized and published via a circular. So probably late 2016 assuming the circular is released within the year . Can you and I make it? God’s grace in God’s time.
The other is on increasing market rates, which BSP has already started a few months ago. The outlook is that we might see a further gradual increase in rates in the months and years to come again to decelerate lending, manage liquidity supply and temper inflation. Hopefully higher rates just enough to keep our economy within its growth trajectory. Of course, higher rates means higher cost of capital, which banks will have to recover via higher interest rates on their loans.
Relating it to PSE, affected stocks are those in property development and real estate, as well as the banks. Or those conglomerates who have both. There are a number of these companies listed in PSEi. Unless as we speak, the market has already priced in these developments. A little bit priced in, maybe.