(Part 10 of a series)
After few years of hubby's hard work abroad, we finally have sufficient money to start our dream house. We cannot decide if we are going to hire the labor, hire an architect/engineer, and buy the materials on our own or is it better to hire a hassle-free contractor? -- Joann
I'm a 23 year old currently working in Dubai. I'm earning well enough to send my siblings to college and save up for myself. I'm planning to start building my own house when I come home this year but I honestly don't have any idea about loans. I have however availed of the Pag-Ibig Overseas program and am eligible for a P1.6-million loan. Any advice? -- Kamille
When it comes to your first home, there are always at least two sides to consider.
Finance is the first because it is our reality check. Anyone who has ever tried asking an architect to put into paper a design for a home knows that the dream house is almost always way beyond the budget.
An upside for new homeowners is the current low interest rates. Compared to the market situation in the 90s, the cost of mortgage today is very affordable. Commercial rates go for under 12% for up to 25 years. Not only is this lower than pre-1997 crisis rates, banks now allow for fixed mortgage rates, even for 25 year housing loans.
Those who argue that a fixed rate loan prevents the borrower from taking advantage of falling rates lose sight of the fact that the borrower is protected from the repricing uncertainty. The borrower cannot be protected from repricing risk (both up and down) and still have the benefit of downward flexibility if rates fall.
Kamille, check the website of different banks, especially the housing loan calculators. This gives you a clear idea of the monthly amortization, depending on the amount to be borrowed and the term of the loan.
Going for a very long-term housing loan will not always be good. Remember that interest is paid on the outstanding balance and so the longer you maintain a loan the more you pay in interest. Choosing too short a term will also not work well because a higher monthly amount may be too much to bear. If something unexpected happens with Kamille's income, the mortgage is in trouble.
Joann is concerned about the second side of building a dream home and that is the practicalities of converting an empty lot into a home.
Her concern can actually be generalized into a two-step question: Do you buy a ready-made home or build one? If you decide to build, do you do handle the logistics directly (engage the architect/interior designer, hire the laborer and buy the materials) or do you outsource all these to a contractor?
There is no golden answer. I know of one couple who took a mortgage to buy a home before getting married. They ended up with outlets that short circuited anything plugged into them, aircon outlets that didn't work because there was no electrical wires attached, a fuse box that was underpowered for the house and a living room that were eight to ten inches deep when rains were heavy. Oh, did I also tell you that the kitchen sink refuse went straight out of a hole into the street so their neighbors literally knew what was cooking for the day?
Building a home isn't any easier. If you don't have any reliable contacts, hiring the labor is going to be a big problem. Would you or your spouse have the time to physically supervise the day-to-day build up of your dream home? More importantly, could you tell if something being dug, cemented or wired was not in order?
My own experience with contractors hasn't been encouraging either. Again, even if you are physically present on site, you depend on the contractor to get several different things moving at the same time, working towards the same goal. Since contractors end up committing to several simultaneous projects, they often outsource jobs with contractual workers. This is a hit-or-miss situation since it is difficult to impose a quality standard. Besides, even if the contractor's own employees do the work, individuals do the digging, cementing, cutting, welding, the wiring. It is impossible, and unproductive, to have someone second-guess each and every worker. In the end, there is a fair amount of trust --- and luck --- involved here.
Personally, I prefer the US system where inspections are done by ?city hall? in stages: civil works, electricals and safety standards. This ensures that oversight doesn't get built into other oversights. This, though, is a separate story.
Joann, your decision may ultimately rest with your own limitations. If you have the time to canvass for the construction materials, have a ready network of laborers, and has enough know-how to spot errors in works-in-progress, centralizing the construction will likely cost less. Consider that saving as payment for your time and expertise in being a multitasking expert, combining the role of a purchasing manager, a finance manger, a human resource specialist and a hands-on site manager.
If you decide to outsource the work to others, the onus on control rests with the contractor. When you buy a home on an as-build basis, there are no headaches with supervision and operations but there may be surprises once you and you family moves in.
Come to think of it, both of you, Kamille and Joann, will surely have your own housing story to tell. Whether it?s the financing or the sockets or the drainage, something surely will pop out. That's not an ?if? but a ?when?. That's part of owning a home.
(Have a question for Dr. Noet? Email firstname.lastname@example.org.
(Noet Ravalo is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work. Since 1994, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos' personal finances.)
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