Illustration by Steph Bravo
Understanding the jargon of home loans can be confusing, overwhelming and a wee bit frustrating at times.
But you don’t have a choice: if you’re bent to make the most out of your loans and savings, you will need to at least make an effort to fully understand these terms commonly used by your bankers and brokers.
This way, you won’t feel cheated or forced into taking that huge leap as you work on your dream home. Remember, ignorance is not and will never be an excuse—more so in this day and age when it’s much easier to do research and look up banking jargon via the internet, whether through your laptops, tablets or even mobile phones.
In the Philippines, banks like Metrobank have comprehensive websites that usually contain most of the information you will need to know before taking out a loan—the products and features offered, processes involved, requirements and even definitions of some terms you have to be aware of.
Here are some of the most common terms you’ll likely come across with once you start looking for the right banking partner that will suit your loan needs.
Home Loan
A home loan refers to a sum of money borrowed from a financial institution or a bank, usually for the purpose of buying a lot, a house and lot or a condominium unit. Some institutions, like Metrobank, offer home loans that can also be used for home construction, renovations, or even for the refinancing of an existing home loan.
PRINCIPAL OF A LOAN
The principal of a loan refers to the actual amount borrowed.
INTEREST RATE
The interest rate, mainly expressed as a percentage of the principal, is used to compute the amount to be paid for the money borrowed. It can also be regarded as the “cost of borrowing” money from the bank, and depends on prevailing market rates.
Metrobank offers one of the most competitive interest rates, ranging from as low as 5.88 percent to 10.5 percent. Borrowers usually prefer lower interest rates, but these are offered when the repayment period is shorter.
REPAYMENT
Repayment is the “act of paying back money previously borrowed from a lender. Repayment is typically executed through periodic payments that include part principal plus interest.”
TENOR OR REPAYMENT PERIOD
Tenor commonly refers to the time or period set for the repayment of a loan or until a financial contract expires.
Usually, a shorter tenor means lower interest rates. A longer repayment period fetches higher interest rates because of the belief that there is a greater risk involved, meaning there is a bigger chance that something might go wrong i.e., borrower not being able to complete all due payments.
INTEREST FIXING PERIOD
Financial institutions like Metrobank offer a way to keep your investments in real estate protected via an interest fixing period. This refers to the length of time you want your interest rate to remain the same despite whatever movements the interest rate may experience in the future.
Metrobank explained that this will allow you to protect your loans from market volatility and shifts in the real estate market. If there is a hike in interest rates anytime within the interest fixing period, the rate on your loan will not be affected. Metrobank offers one-year fixing (5.5 percent); two and three years (6.25 percent); four and five years (6.88 percent); six to 10 years (8.5 percent); and 11 to 15 years (10.5 percent).
The interest rate will only be reviewed and changed when the fixing period expires.
It’s still best to consult a Metrobank home loan expert and to do your own research about the current economic conditions before deciding on your preferred fixing period.
COLLATERAL
Collateral is defined as “a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender (bank) can seize the collateral to recoup its losses.”
For Metrobank, the documentation to satisfy the collateral requirement can be: transfer certificate of title or condominium certificate of title and tax declaration (land, improvement, or condo unit. The bank may also ask for the following to evaluate the loan: contract to sell or reservation agreement if under developer tie up; and floor plan, bill of materials, or job specifications for house construction.
LOAN FEES
Remember, the cost of borrowing money from a bank does not end with paying the interest and the principal alone. There are other minimal fees that you should be aware of as well.
For Metrobank home loans, these include fees for registration, notarial charges, appraisal, title investigation, handling, mortgage redemption and insurance.
Indeed, there are no shortcuts if you intend to be a well-informed home buyer and a responsible loan borrower. A little patience to go through all these minute details might prove to be more beneficial than you think in the long run.
Sources: www.metrobank.com.ph; economictimes.indiatimes.com; www.investopedia.com; www.businessdictionary.com