Are you feeling the sting of the 8.7% inflation rate in the Philippines? If so, you might need help to fund big-ticket items or long-term goals you’ve been dreaming of. Enter home equity loan.
This financing option allows homeowners to borrow their property’s market value. With this type of loan, you can fund medical bills, your child’s education, car purchases, and investments.
But is this financing option suitable for you? In this article, we will explore the basics of home equity loans in the Philippines, including how they work, their benefits, and how to use them to your advantage.
- What is a home equity loan?
- Ways to use home equity in the Philippines
- What are the risks associated with home equity loans?
- What are the interest rates for home equity loans
- How much money can I borrow from a home equity loan
- How do I qualify for a home equity loan in the Philippines?
- Is a home equity loan for me?
What is a home equity loan?
A home equity loan is a type of loan that allows you to borrow money using the equity in your home as collateral. Equity is the difference between the current value of your home and the amount you still owe on your mortgage.
To explain it more clearly, imagine you bought a house for ₱2,000,000 and have already paid off ₱500,000 of your mortgage. Then you have ₱500,000 worth of equity in your home.
With a home equity loan, you can borrow money against this equity.
Ways to use home equity in the Philippines
You may be sitting on a hidden treasure if you have a property that has a high value. By leveraging your home equity, you could access funds for different purposes, like the following.
✅ Home improvement — If your home needs some tender loving care (TLC), using your home equity could be a good option to fund the necessary repairs or renovations. Home improvement projects could increase the value of your property, making it a wise investment.
✅ Education – Education is a valuable asset that could help you secure a better-paying job or career advancement. You could use your home equity to pay your tuition fees or other related expenses.
✅ Debt consolidation – If you have high-interest debts, such as credit card balances or personal loans, consolidating your home equity into a single loan could save you money on interest charges.
✅ Emergency cash – Life is unpredictable, and emergencies can happen anytime. Using your home equity to access some money for unexpected expenses could be a financially sound decision.
✅ Second home purchase — If you dream of owning a vacation home or rental property, using your home equity could make it possible. However, additional properties come with other expenses, such as property taxes and insurance.
Home equity, although it gives you access to funds through loans, also comes with risks. Read further below as we discuss each one.
What are the risks associated with home equity loans?
Here are five risks to be aware of:
❌ Risk of foreclosure — Home equity loans are a type of secured loan, meaning you use your home as collateral. If you fail to make payments, your bank could foreclose your home.
❌ Variable interest rates — Unlike fixed-rate loans, home equity loans often have variable interest rates. Monthly payments can change over time, and you could pay much more than you anticipated.
❌ Debt trap — Yes, taking out a home equity loan can give you access to a large sum of money. But it also comes with the risk of accumulating more debt than you can handle. This can lead to a cycle of borrowing and repayments that can be difficult to break.
❌ Closing costs – Like with any loan, there are costs associated with home equity loans. These can include application fees, appraisal fees, and other expenses. Make sure you understand all the costs involved before you sign the fine print.
What are the interest rates for home equity loans in the Philippines?
The interest rates vary from one lender to another. If you choose to borrow money from a bank, you’ll get lower interest rates than lending companies.
For example, Security Bank offers 8.00% for 1-year fixing period and 8.25% for three years fixing period.
Here are some of the home equity loan interest rates we have gathered so far. Remember that these rates are subject to change. You can visit the website of each bank for more information.
(1 Year Fixed Rate)
|Appraisal Value||Loan Term|
|Maybank||7.00%||Up to 70%||Up to 10 years|
|Metrobank||7.25%||Up to 60%||Up to 10 years|
|Security Bank||8.00%||Up to 70%||Up to 15 years|
PAG-IBIG also has its own Home Equity Appreciation Loan (HEAL) that offers qualified members to borrow funds based on the net value of their home, payable for up to 30 years.
How much money can I borrow from a home equity loan in the Philippines?
Home equity loans in the Philippines have different maximum loan amounts and loan-to-value (LTV) ratios. LTV measures the value of a loan against the value of your property, which is usually expressed in percentage.
How much money you can borrow depends on these factors and other requirements of the bank or lending company. To give you more context, here are some figures.
- Security Bank, for instance, gives you a minimum loan amount of ₱1 million and up to ₱10 million.
- Maybank is a little bit on the conventional side as it can only give you 70% of your property’s value, a maximum of ₱5 million.
Several factors will also affect how much funds you get, which we will highlight in the next section.
How do I qualify for a home equity loan in the Philippines?
Generally, banks consider the following to evaluate your eligibility.
💰 Equity — Lenders typically require that you have a certain amount of equity in your home before you can qualify for a home equity loan.
💰 Credit score — If you’re always on time in paying credit card dues and loans, you will likely have a high credit score. There’s also a probability that you will qualify for the best rates.
💰Income — Banks will check your household income to check if you can make loan payments every month.
💰 Debt-to-income ratio — This is the amount of debt you have compared to your income. A lower debt-to-income ratio may increase your chances of qualifying for a home equity loan.
💰 Property value — Lenders may also consider the value of your property when evaluating your eligibility for a home equity loan. They may require an appraisal to determine the value of your home.
Is a home equity loan for me?
A home equity loan is a way to tap into the equity you have built up on your property. But before you jump in, ask yourself, “Is home equity loan for me?” It may seem like a quick fix for your financial needs, but it’s important to weigh the pros and cons.
Another factor to consider is your debt-to-income ratio. This ratio measures your monthly debt payments against your monthly income. If you’re already struggling to pay off existing debts, adding another loan might not be the best idea.
You should also review the fine print of the loan agreement before signing to make sure you understand the terms and conditions.
Meanwhile, if you’re considering investing in a property, a home equity loan can be a viable option. A second property that can generate rental income may be a good way to diversify your portfolio. But before you take the plunge, always negotiate terms with your bank and assess the rental market’s potential earnings.
Remember to always consult with a trusted financial advisor and do your research before deciding.
Have you applied for a home equity loan? What was your experience? Share your thoughts in the comments below.