Should you pick fixed or floating interest rates given the rising rates of housing loans in the Philippines?
Which is better for homeowners on a budget? Which is more economical in the current market conditions? Read on to find out more.
What is Fixed Interest Rate?
It’s also sometimes referred to as fixed-rate mortgage. The interest that you pay monthly for your housing loan remains fixed, regardless of changes in interest rates in the market for the entire duration of the loan.
Why Should You Choose a Fixed Interest Rate?
With a fixed interest rate, you can better manage your finances. When you know just how much you will be paying for your housing loan every month, you can better manage your monthly budget.
It also provides you a sense of security. You minimize your risks with fixed interest rates, especially with unstable or unfavorable market conditions.
You can rest easy knowing that your interest rates will remain the same should there be a significant increase in market rates. There are no surprises because you pay a stable interest rate.
In the Philippines, banks offer a certain number of years with fixed interest. Borrowers will decide how many years they want to pay fixed rates. When the fixing period is over, the interest rate is then subject for repricing.
If you have availed of a 15-year housing loan with a 5-year repricing option, this means that you will pay a fixed interest rate for the first 5 years.
At the end of the fifth year, your housing loan will be repriced, and you will pay a new interest rate, depending on different market conditions.
The Downside of Fixed Interest Rates
Because the interest rate is fixed, you will still pay the same amount within the fixing period, even if interest rates suddenly dropped significantly. This is why fixed interest rates are more expensive sometimes.
Here are some examples of fixing periods and their corresponding interest rates of three of the top banks in the Philippines.
BDO Housing Loan
| Fixing Period | Interest Rate |
| 1 year | 6.50% per annum |
| 2 years | 7.25% per annum |
| 3 years | 7.50% per annum |
| 4 years | 8.00% per annum |
| 5 years | 8.00% per annum |
BPI Housing Loan
| Fixing Period | Interest Rates |
| 1 year | 6.50% |
| 2 years | 7.25% |
| 3 years | 7.00% |
| 4 years | 8.00% |
| 5 years | 7.88% |
| 10 years | 9.50% |
| 15 years | 10.50% |
| 20 years | 12% |
Metrobank Housing Loan
| Fixing Period | Interest Rates |
| 1 year | 7% |
| 2 years | 7.25% |
| 3 years | 7.50% |
| 4 years | 8.00% |
| 5 years | 8.50% |
What is Floating Interest Rate?
A floating interest rate depends on the changes that happen with the market. Unlike fixed interest rates, floating interest rates can go up or down with every monthly payment.
Why Should You Choose Floating Interest Rates?
When the market is good, floating rates can be very good as well. Your monthly payments will be lower and more affordable.
It’s only advisable to choose floating interest rates if the market is down and you are sure that your interest rates will not go significantly higher in the coming months.
The Downside of Floating Interest Rates
Because of the variable interest rates, it’s more challenging to stick to a budget because you don’t know the exact amount you need to set aside each month for your mortgage.
You expose yourself to higher risk, and there’s also a sense of uncertainty while you’re paying off your housing loan. Should there be an economic crisis, your interest rates will either drop or skyrocket.
Fixed Interest Rates on Pag-Ibig Housing Loans
When you apply for a housing loan through Pag-Ibig, the interest rate is fixed at 4.5% for the first 10 years for loans amounting up to 450,000 PHP. The income requirement is 15,000 PHP for Filipinos working in NCR and 12,000 PHP in other regions.
For housing loans amounting up to 750,000 PHP, the interest rate is fixed at 6.5%, with an income requirement of not more than 17,500 PHP for Filipinos in NCR and 14,000 PHP in other regions.
After the 10-year lock in period, it’s subject to repricing based on the prevailing interest rate or it’s increased by 2%, whichever is lower.
How to Make the Most of Your Housing Loan Despite High Interest Rates
Determine how much you want to pay for your mortgage.
To qualify for a housing loan, you must have the capacity to pay for the loan. You should be earning more than enough to pay for your loan and your living expenses.
Take out a realistic loan amount so that you don’t end up overextending yourself on your mortgage.
Plan how long you will live in your new home.
Are you purchasing the house as a family home, and perhaps as your retirement home as well? Knowing the answers to these questions from the outset can help you determine whether a fixed or a floating interest will work best for you.
Try to put in a bigger down payment.
The bigger the down payment, the lower your monthly payments and interest rates would be. Try to raise at least 20% and pay for it upfront so that you only have to worry about your monthly amortizations.
Shop around for the best housing loans.
Compare rates and terms before applying for one. Don’t go for the first offer that you receive without asking around first.
At first glance, they may all look the same. But read the fine print and you will see that there are some offers that are better than others. You just need to be very particular and know what you want out of your loan.
Make use of online loan calculators.
These are a great help when you’re trying to decide on a budget for the home you wish to purchase.
You can play around with different calculations without having to worry about other people waiting for you to finish or without being pressured by a loan officer to make a decision ASAP.
You can visit different bank websites or loan providers and key in a loan amount, payment period, and fixed interest period to get a sample computation of your monthly payment. This will give you a good idea on how much money you need to purchase that dream home.
When should you get fixed interest and floating interest rates?
This will depend on your finances. If you can afford to pay for fixed rates or floating rates, it should not be a problem.
If you’re purchasing a home for your growing family, with kids attending school and the cost of living increasing with every year, you will benefit from fixed interest rates.
The amount that you will pay for your home every month will not change, and you can better manage your finances and allot the amount that you save for other worthwhile things.
Opt for fixed interest when you don’t want to worry about sudden increases, or when interest rates are low and you want to avail of that rate for a certain number of years.
Whilst there is an element of predictability, fixed interest rates are more expensive. Your risk is reduced because you know exactly how much you will need to pay every month for the duration of your loan.
On the other hand, choose floating interest rates when you’re 100% certain that interest rates will drop in the near future, or when the market is down and interest rates are bound to get lower and lower.
Floating interest rates are flexible, and you can save money on your mortgage when market conditions are favorable.
The great thing about housing loans in the Philippines is that you can enjoy a fixed rate for a certain period, after which the interest rates will be repriced.
Depending on current market conditions, these can go higher or lower, or pretty much remain the same. But you, the homeowner, still get to decide.
Whether it’s best to go for fixed or floating interest rates will depend on your financial capability, your preferences, and your needs.
Although your choice will have a significant impact on how much your home will cost, remember that you have the option to change how much interest is charged on your housing loan.
Our main word of advice: don’t be tempted by very low interest rates on the first year. Remember that interest rates can be repriced after the fixing period, and you can end up paying for something much higher after that. Consider your present and future cash flow when you need to make the choice between fixed and floating interest rates.