The Dangers of In-house Financing - Lazy Investing Way

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Tuesday, December 12, 2017

The Dangers of In-house Financing


I have seen some rants and complaints via social media among my peers and network regarding in-house financing. As someone involved in the Real Estate & Finance industry, I try to make it a point to talk about ‘difficult topics’ or even taboo ones which very few people seem to talk about.

When buying a home or a new condo-unit, there are about four ways to purchase a property: cash, Pag-ibig HDMF, getting a bank to finance your purchase, or leveraging on the available in-house financing options offered by property developers.

Not everybody has cash to pay for a property immediately, so let’s start with Pag-ibig. The Home Development Mutual Fund (HDMF) or Pag-IBIG Fund has made it easier for a Filipino minimum-wage earner to own his or her very home in the Philippines without needing a lot of cash. Because it is a government-supported initiative (and a mandatory employment benefit), interest payments and amortization are not that expensive. But you can still be turned down if you’re a credit risk.

Banks on the other hand are known to be particularly stringent in their loan application processes, requiring a handful of documents that need to be submitted (financial statements, ITR, COE, payslips, business registration and valid identification) and will have to undergo review/investigation.

However, in-house financing options are technically not loans. These are extended payment terms (installment) with above average interest rates. It does not require that much paperwork outside your certificate of employment or source of income. As such, there is a low chance to get denied.

Because it doesn’t undergo the same rigorous review, in-house financing is relatively “easier” and less time-consuming to comply with compared to the Pag-ibig/bank’s process.

To add, in-house financing actually has a higher interest rate compared to banks, with a range of 14% to 18% for a shorter period (5 years only). The rates are “allegedly fixed” and not subject to economic volatility, HOWEVER – these In-House Financing schemes are not regulated at all; which could be abused easily as well.

To be regulated means that there’s an authority creating a quality control of a subject system, its process or its product. The need for greater regulation is obvious.

Digging Deeper

Bare-in-mind that ‘lending’ or ‘financing’ are not property developers' core expertise, so there might be some serious underestimate in the credit worthiness of home buyers as well as in implementing the whole “financing” mechanism that they offer.

Property Developers will of course praise the convenience of “in-house financing” but the reality is, no one is monitoring this; we don’t know how much the actual exposure of this particular “real estate lending” may be and perhaps it is understated (technically shadow banking). SEC, BSP don’t monitor it due to jurisdiction issues. And HLURB is not equipped to deal with such things either.

I’m not saying it’s a bubble but it is a real risk that nobody seems to be talking about and should disaster strike, a lot of families as well as the sector/economy will be affected.

Even if it is not ‘CONVENIENT’, I think it is still better to go for bank or Pag-ibig financing as they are regulated and also because they have MRI – Mortgage Redemption Insurance. Pag-ibig’s MRI states that: “MRI renders the housing loan fully paid upon death of the borrower provided the
amortization payments are up to date.”

“Caveat emptor”—let the buyer beware (and Be Aware)!


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Originally Published in Philstar - The Freeman Newspaper last December 12, 2017.

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