Do you need bank financing for your planned property acquisition? Were you advised about the mortgage? What is a mortgage? What are its essential elements?
Basic terms
Jose Maria Manresa Y Navarro in his Comentarios al Codigo Civil (cited by Antonio and Edilberto Noblejas in Registration of Land Titles and Deeds) defined mortgage as “contract in which the debtor guarantees the creditor, the fulfillment of a principal obligation, subjecting the faithful compliance on a real property in case of non-fulfillment of said obligation at the time stipulated.”
In end-user financing, mortgage refers to an agreement entered by the borrower who is a house or condominium unit buyer and needs financing, and a lender, usually a bank, savings associations, and government institutions like Social Security System, Government Service Insurance System and Home Development Mutual Fund.
Financing is intended to cover the unpaid balance of a pre-purchased house or condominium unit. To ensure that the lender or mortgagee is repaid, the borrower or mortgagor uses the property as collateral or security. In exchange, the borrower agrees to repay the lender specified sums called amortization for the loan amount or principal, plus interest over a specified period.
Interest rates and terms
The loan application is often made before the property is turned over to the buyer. While banks take only a few days to process such applications, there are developers who require buyers to hand over the bank’s letter of guaranty early. It is also common among conservative developers to require buyers to secure a pre-approved letter of guaranty before being allowed to purchase a property.
Interest rates used are either fixed or variable. Private banks’ fixed rates range from a low 4.99 percent for one-year, up to 12 percent for 30 years. As rates fluctuate, borrowers should weigh the advantages and risks before deciding which one to choose.
While most banks have a 25 to 30-years repayment maximum, this period may be shortened or lengthened according to the borrower’s age so the loan can be fully repaid by his 60th or 65th birthday, depending on the bank’s policy.
After the developer is paid by the bank, loan payment starts after a month, with the amortization usually a combination of principal and interest, although at least one bank allows interest-only amortization for the first six months to assist their clients. Many banks allow lump sum amounts to be paid every loan anniversary to shorten the repayment period.
Lenders will hold on to the owner’s duplicate title for the mortgage duration. They will also annotate the mortgage on the title to protect their exposure in case of borrower’s default.
Many banks require borrowers to secure Mortgage Redemption Insurance (MRI) or its equivalent, intended to address the borrower’s potential default in case of incapacity or death. With the MRI, the debt is extinguished using the insurance proceeds.
Borrowers cannot be prevented from repaying loans early, although penalties may be imposed.
Foreclosure and right of redemption
Prior to the borrower’s default, lenders would give debtors time to resolve the repayment problem. Depending on the agreed terms, banks may or may not have “recourse” that requires the developer to buy back the subject property in case of the borrower’s default. In the worst scenario, the bank will foreclose the collateral.
Under RA 3135 or “An Act to Regulate the Sale of Property Under Special Powers Inserted In or Annexed to Real Estate Mortgages,” as amended by RA 4118, and RA 8791 or “The General Banking Act of 2000,” lenders may foreclose using judicial or extrajudicial means depending on the agreement.
Meanwhile, the debtor is given the right of redemption and property recovery within a year from the registration date of the property sale after extra-judicial foreclosure, or if the mortgagee is a bank in case of judicial foreclosure. If the mortgagee is not a bank in a judicial foreclosure, the equity of redemption is limited to 90 days after final judgement but prior to the confirmation of the sale.
Be warned however, that the amount needed to redeem the property will no longer be the amount owed but will include taxes, interests, fees and other expenses incurred.
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Henry L. Yap is an architect, environmental planner, real estate practitioner and former professorial lecturer.