Overcoming the Down Payment Hurdle in Real Estate
For many Filipinos, saving enough for a down payment is a major obstacle to owning a home. Developers typically require a down payment of 20% of the total contract price (TCP) for a house-and-lot or condo unit. Fortunately, many developers offer installment plans of up to 60 months with zero interest, making the process more manageable. But what if you miss a payment?
In this blog, we’ll cover everything you need to know about down payments, equity, loan-to-value ratios, and what to do if you miss a payment.
Case Studies of Down Payment Challenges
Case I: High Monthly Equity, Low Monthly Amortization
Project: One Story Rowhouse
Location: Basak, Lapulapu City
Price: PHP 1.1 million
Reservation Fee: PHP 5,000
Equity: PHP 645,000 (payable over 48 months)
Monthly Equity: PHP 13,438
Home Loan: PHP 450,000
Monthly Amortization: PHP 2,520 (for 30 years)
This affordable house-and-lot in Mactan Island, Cebu, offers a manageable monthly amortization of PHP 2,520. However, the high monthly equity of PHP 13,438 for 48 months can be a financial strain.s.
Case II: High Monthly Equity, Low Monthly Amortization
Project: Two Story Townhouse
Location: Kalawisan, Lapulapu City
Total Contract Price: PHP 2,195,000
Reservation Fee: PHP 15,000
Equity: PHP 537,000 (payable over 36 months)
Monthly Equity:
1st - 12th Months: PHP 16,000
13th - 36th Months: PHP 14,375
Home Loan: PHP 1,643,000
Monthly Amortization: PHP 9,200 (for 30 years)
This highly regarded townhouse offers quality and strategic location. Despite the low monthly amortization, the high initial equity payments can be challenging.
Case III: High Monthly Equity, Low Monthly Amortization
Project: Two Story Townhouse
Location: Babag, Lapulapu City
Total Contract Price: PHP 1,750,900
Reservation Fee: PHP 15,000
Equity: Includes miscellaneous fees
Monthly Equity:
1st - 9th Month: PHP 26,992
10th - 30th Month: PHP 9,815
Home Loan: PHP 1,427,660
Monthly Amortization: PHP 7,994 (for 30 years)
This development is noted for its excellent expandable units. Although the monthly amortization is low, the initial high equity payments can be overwhelming.
Preparing for the Down Payment
Many Metro Cebu housing projects require a significant down payment. To buy a house-and-lot, start saving early. Developers usually ask for a 20% down payment of the TCP, with the remaining 80% covered by home loans.
A higher down payment reduces your monthly loan amortization. If possible, pay more than the minimum required 20% to lower your monthly payments.
Understanding the Loan-to-Value Ratio
Why is the loan capped at 80%? Lenders use the Loan-to-Value (LTV) ratio to assess risk.
How to Calculate Your LTV Ratio:
LTV ratio = (Loan Amount) / (Appraised Value)
If you borrow P2,400,00 from the bank and the appraised value of the property is P3,000,000, your loan-to-ratio value is computed as follows:
LTV = (2,400,000) / (3,000,000) LTV = 80%
Note: Most lenders offer the best rates when the LTV ratio is 80% or lower. Higher LTV ratios are riskier and may lead to higher costs.
Down Payment vs. Equity
While often used interchangeably, down payment and equity are distinct. The down payment is what you pay upfront, while equity represents the value you own in the property.
For instance, if the TCP is PHP 1,000,000 and your loan is PHP 800,000, your down payment is PHP 200,000. Over time, as you make payments, your equity increases, reflecting the portion of the property you own.
Monthly Equity Payments
In the Philippines, monthly equity refers to installment payments for the down payment. Developers often allow up to 60 months for payment with zero interest.
Example from Case I: Instead of paying PHP 645,000 upfront, you pay PHP 13,438 monthly for 48 months. The length of the equity term depends on the project's development stage. Ready-for-occupancy units usually offer shorter terms.
Addressing Down Payment Issues
Starting Payments: Typically, you start paying 30 days after reservation. You may need to issue post-dated checks.
Cancelling Payments: If you want to cancel, formally request the developer to stop processing checks to avoid bounced payments.
Refunds: Down payments are often non-refundable, but they are subject to the Maceda Law.
Refunds under the Maceda Law: If you’ve paid for at least 2 years, you can receive a refund under certain conditions. You are also entitled to a grace period and may transfer the contract.
Refunds under PD 957: If the developer fails to complete the project, you can claim a full refund minus penalties.
Unregistered Developers: If the developer is unregistered or lacks a License to Sell, you can demand a full refund. However, if you believe the developer will complete the project, you might choose to continue payments.
This guide is for educational purposes only. Consult a lawyer for advice on your specific situation. If you have any questions or need personalized assistance, contact us at 0920 207 5035 or email cebuhousefinder@yahoo.com. We're here to guide you every step of the way, ensuring a smooth and confident buying experience.
Project: Two Story Townhouse Location: Babag, Lapulapu City Total Contract Price: P1,750,900 Reservation Fee: P15,000 Equity: inclusive of misc. fees
1st - 9th Month: Php 26,992/month 10th- 30th Month: Php 9,815/month Home Loan: P1,427,660
P7,994/month for 30 months
This subdivision is one of the best townhouse developments in Mactan Island wherein the homebuyers have the option to expand the unit. The expanded units are really good.
PREPARE FOR THE DOWN PAYMENT
As you can see, most of the housing projects in Metro Cebu required a high amount for the down payment or the equity. If you are planning to buy a house-and-lot, you start savings for the down payment. Usually, the developers require for 20% down payment of the house-and-lot. The home loan provider (Bank, Pag-Ibig Fund, In-house) will cover only 80% of the Total Contract Price of the property.
The higher the down payment the lower the monthly amortization of the home loan. If you have the money, it is better to pay higher than the required 20% of the Total Contract Price of the property. In so doing, your monthly amortization for the home loan is lower.
THE LOAN-TO-VALUE RATIO
Why only 80% of the Total Contract Price? The home loan provider used the Loan-to-Value ratio in determining the lending risk of the property in case of foreclosure of the property.
Home buyers can easily calculate the loan-to-value ratio on their home.
LTV ratio = (Loan Amount) / (Appraised Value)
If you borrow P2,400,00 from the bank and the appraised value of the property is P3,000,000, your loan-to-ratio value is computed as follows:
LTV = (2,400,000) / (3,000,000) LTV = 80%
"Most lenders offer mortgage and home-equity applicants the lowest possible interest rate when the loan-to-value ratio is at or below 80%." the investopedia said. "Typically, assessments with high LTV ratios are higher risk and, therefore, if the mortgage is approved, the loan costs the borrower more."
DOWN PAYMENT AND EQUITY
While these terms are interchangeable in real estate, they are really different. As we noted above, the home loan provider (e.g. bank or Pag-Ibig Fund) will only cover 80% of the Total Contract Price and the balance is often called as the required down payment to be paid by the home buyer to the developer.
The Required Down Payment. If the Total Contract Price of the property is P1,000,000 and the loanable amount is P800,000 (80% of the TCP), the required down payment is P200,000.
The Equity. To put it simply, it is the difference between the fair market value of the property and the amount of money you owe on the mortgage. If the total contract price (supposedly also the fair market price of the property) is P1,000,000, you deduct the money you owe from the bank of P800,000, the sum is your equity of the property which is P200,000.
This is why the down payment is also referred to as the equity.
Each time you pay for your monthly amortization, your equity increases, thus P200,000 plus the amount you already paid the bank. Each month you pay for the (interest + capital) of your home loan, you are adding value to your equity. As your balance decreases, the equity you have increases as well. In short, it is the percentage of your home that you own.
THE MONTHLY EQUITY
In PH real estate, the monthly equity refers to the installment payments for the down payment of the house-and-lot. Most developers allow the home buyers to pay the down payment for as long as 60 months with zero interest.
Based on Case I above, instead of paying the whole amount of P645,000, the home buyers will pay P13,438/month for 48 months . The 48 months is the equity term which is determined by the developer. The equity term is determined by the development of the subdivision. The closer the development to completion, the shorter the equity term. The ready for occupancy house-and-lot has 3 months to 12 months only.
ISSUES RELATED TO THE DOWN PAYMENT
1. When do you start paying for the down payment?
Usually, you start paying for the down payment 30 days after the date of reservation or you can arrange with the developer the due date. You need to issue post-dated checks with specific due date.
2. Can you cancel the payment of the down payment?
Since you already issued the PDCs, can you cancel the payments? The developer cannot force you to pay when you can no longer continue the payments. You need to formally ask the developer to stop depositing the remaining checks so that they will not bounced.
3. Can you ask for a refund?
Usually, it is stated in the Contract to Sell that your down payment is non-refundable. However, it is subject to the Maceda Law.
4. Refund under the Maceda Law
The Maceda Law or Republic Act No. 6552: Realty Installment Buyer Protection Act (1972), aims to protect the real estate buyers on installment payments against onerous and oppressive conditions. Thus, it is often called the Rights of Installment Buyers.
Under the Maceda Law, you cannot demand for a refund when you paid less than two (2) years. However, you are entitled to a Grace Period of not less than 60 days from the date the installment is due. Within the grace period, you can reinstate the contract by updating your account. You also have the right to sell or to assign the property to another buyer.
When you paid at least 2 years, you are entitled for a refund. You are also entitled for a 30 days grace period and you can reinstate the contract by updating your account. You also have the right to sell or to assign the property to another buyer. How much is the refund? If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property. Rate of refund: 50% from 2nd year to 5th year plus 5% per year in excess of 5 years, however, aggregate rate should not exceed 90% of the total payments made.
The developer can cancel the Contract to Sell between you and the developer/seller subject to the mandatory twin requirements for a valid and effective cancellation of the Contract to Sell under RA 6225: (1) send a notarized notice of cancellation and (2) refund the cash surrender value.
Read our in-depth discussion of the Maceda Law.
5. Refund under PD 957
When the developer failed to develop the subdivision project, based on PD 957, you can demand for a refund. How much? 100% of the total payments less penalty interest plus legal interest. Read our in-depth discussion of Refund under PD 957.
6. Unregistered developer and no License to Sell subdivision project
What happens when you are paying your down payments to unregistered developer and no License to Sell subdivision project? If you think the developer cannot deliver the subdivision project, you can stop the payments and demand for a refund. Visit the HLRUB regional office to file your complaint. The refund must be 100% of the total payments less penalty interest plus legal interest.
However, you must remember that the Contract to Sell is still valid even if the developer is unregistered and there is no License to Sell. If you are confident that the developer cam develop the subdivision project and deliver your house, there is no reason to stop your monthly installments.
The purpose of this blog dealing with the property law is only to give you an idea about your rights as a property buyer. For your specific case, you have to visit the HLURB to seek legal remedies. If not resolved, you hire a competent lawyer for legal resolution of your case.
For more information about the topic or any inquiries about buying a property in Cebu, please contact us at 0908-301-7398 or send us an email at cebuhousefinder@yahoo.com. We help home buyers to find their dream house at the best price and location… for free!
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