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Get a Home Loan Soon(er); Loan-to-Value (LTV) and Interest Considerations

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.

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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.
3D Realty Handshake by lumaxart, on Flickr
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).
Lower 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%. 

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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 propertiesExpected 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.
Higher Rates
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.

See related Inquirer article here: BSP to Cap Banks’ Property Lending


Photos:
BSP Logo from BSP website
3D Realty Handshake by  lumaxart 

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About Geri (346 Articles)
Founder and main author. Husband, used-to-be-breadwinner, God-made multi-millionaire, employee, financial planner and adviser, investor, stocks trader, entrepreneur, agri-preneur, book author. Firm believer that all Pinoys deserve a richer life. Not a guru, but a forever student of the investments world, a work-in-progress.

4 Comments on Get a Home Loan Soon(er); Loan-to-Value (LTV) and Interest Considerations

  1. That's true! You can also find Business Loans For Real Estate. Thanks

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  2. Hi Dexter. Valid points you raised above. Higher rates may not necessarily be caused by lower LTV caps since as you mentioned it technically lowers the risks involved.

    Higher rates may be caused by BSP increasing its own rates, a different issue altogether. Higher lending rates from BSP makes it more expensive for banks to source funds from BSP so they have to raise more funds for lending via deposits, investments, bonds etc. Popular outlook is that the rate increase will gradually happen. Which makes it interesting as to how banks will adapt to these foreseen changes.

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  3. Anonymous // May 4, 2015 at 2:22 am // Reply

    I do not understand the hypothesis that lowering the loan-to-value ratio increases the interest rates charged by the banks. If the LTV is lower, that means, the loan is more secured, that is because even if the collateral devalues, there would be a larger margin of error for the bank.The devaluation has to dip up to at least 40% (equivalent to the borrower's equity) in order for the bank not to be able to realize or recover what it has given up as a loan. Compared when equity is only 20% or less. If the property devalues by 20%, the loan may no longer be recovered by foreclosure.

    Also, if the loan amount is lowered, more people may not be able to afford housing loans. That means lesser clients for the banks. Basic law on demand and supply dictates that banks would be forced to lessen the cost of capital (interest rates) for borrowers in order to accommodate the latter.

    Can you please enlighten us on this?

    Thank you.

    – Dexter

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