What is a Mortgage?

An OFW’s Guide When Buying an Affordable House and Lot in the Philippines

Indeed, owning your dream home comes with a great financial responsibility that many find it very challenging to meet. Price varies depending on various factors like land area, location, materials used, and type of finish, to name some. In the Philippines, the price of a house and lot ranges from Php 15,000.00 to Php 60,000.00 per square meter. Thus, to meet the increasing cost of having your home, almost all buyers result in mortgages loans.

A mortgage is one of the types of contracts that fall under the purview of Philippine law. The government protects the good faith of the signatories, which is why it is governed and limited by the Civil Code of the Philippines. If it is discovered that the parties involved are in bad faith, it will undoubtedly be declared invalid. Furthermore, numerous protracted litigations are the progeny from a mortgage contract agreements, and if you want to avoid the hassle, time, and money constraints of litigation, it is critical to be well-versed in this matter, whether you are the debtor or creditor in the transaction.

So what basically a mortgage is? How could it help a home seeker alleviate the burden of its financial hindrance? What are the types of mortgage loans available? These are the things that Bria Homes want you to understand to have your own safe space you call your home.

Mortgage is a type of loan used to buy or maintain a home, land, and other real estates. The mortgagor or the borrower corroborates to pay the mortgagee or the lender over a period of time, usually in a series of regular payments that are portioned into principal and interest. And to secure the loan, the property bought through the mortgage loan then serves as a collateral in the event that the mortgagor does not meet the terms of payments. To be valid against third parties (those not party to the contract), a valid mortgage must be annotated on the title to the property at the Register of Deeds, creating a real right enforceable against the entire world.

Read Also: Affordable House and Lot: What is Mortgage Redemption Insurance?

Since mortgage loans involve as suge lum sum of money, the borrower must provide the several requirements to be approved on the application. These include background checking, especially the mortgagor’s finances through their credit score and history, income, and assets through a rigorous process of underwriting.  The lender needs to do this to ensure that the mortgagor has the financial capacity to sustain and meet the payment terms and secure the loan. To do this, the lender imposes a lien on the property and it gives them the power to seize the property and resell it to other interested parties through a process called foreclosure.

It is also important to consider that there are essential requisites for a mortgage to be valid. According to article 2085 and 2125 of the Civil Code of the Philippines:

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. In relation thereto, Article 2125 of the Civil Code reads:

Art.  2125.  In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized.

How do Mortgages Work?

Individuals and businesses, as mentioned above, utilize mortgage loans to purchase real estate property without the need to pay the price up front. The borrower agrees to repay the principal plus the interest over a period of time as indicated in the terms of payment until they totally own the property free and clear. Many of the traditional mortgage loans are fully-amortizing. It means that the payment that the borrowers give will remain the same over the span of the loan; however, different portions of the principal amount and interest will be paid in every payment. Typical mortgage’s payment period lasts for 15 or 30 years.

According to Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.

Cash and a house being exchanged show that the mortgage follows the property.

A mortgage creates a real right which follows the property even if the property is transferred by the mortgagor to someone else. The sale or transfer of the mortgaged property cannot affect or release the mortgage. A transferee is necessarily bound to acknowledge and respect the mortgage. In fact, the mortgage on the property may still be foreclosed despite the transfer.

What are the forms of Mortgage?

To be a public document, the contract for mortgage must be notarized. The parties must appear in person before a notary public and present valid identification with their photograph and signature when having it notarized. Meanwhile, a community tax certificate (CTC) or sedula is not considered competent identification for this matter. Furthermore, if these rules on identification and notarization are not followed, one of the parties may deny the authenticity of the mortgage contract.

On the other hand, there are instances when the mortgage contract is deemed legal even in the event that it is nnot put into writing and formal requirements are not followed. This is known as an “equitable mortgage” and is recognized by our laws. An equitable mortgage is defined as one that, despite lacking in some formality, form, words, or other requisites required by law, reveals the parties’ intention to charge real property as security for a debt, with no impossibility or anything contrary to law with their pure intent. An equitable mortgage exists when the following conditions are met: (1) The parties entered into a contract known as a sale contract; and (2) Their intention was to use a mortgage to secure an existing debt.

According to Article 1602 of the Civil Code provides examples of such situations where an equitable mortgage occurs:

The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefits to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws.

Types of Mortgages

Mortgage loans come in different forms. The most heard of types are the 30-years and 15 year fix rate mortgage loans. Other mortgage terms are as short as 5 year, and others are as long as 40 years, or at times, longer. Many opt to have longer payment terms to lessen the monthly dues. However, the catch of longer payment terms is that it has higher interest added to the principal making the loan’s total amount balloon.

The following are some of the popular types of mortgage loans available for borrowers:

Fixed-Rate Mortgages

The most common type of mortgage is the fixed-rate, often referred to as traditional mortgage. The interest rate under this type of mortgage stays the same for the whole duration of the loan, as well as the monthly payments toward the mortgage.

Adjustable-Rate Mortgage (ARM)

With an adjustable-rate mortgage, the interest rate is usually below the market-rate in the beginning of the payment terms to make the loan affordable and changes periodically based on the prevailing interest rate set by the Central Bank.  This type of mortgage loan is only affordable in the short run but less affordable long term if the rate rises substantially.

ARMs usually have limits on how much the interest rate can increase every time it adjusts and in total over the duration of the payment terms until the property is clear and free.

Interest-Only Loans

This is a type of mortgage loan where the borrower is required to pay only the interest on the principal for a certain period of time. While the principal has to be paid either on lump sum on a specific date or in subsequent payments.

Reverse Mortgages

This is truly unique for mortgage loans or any other types of loan for that matter as this scheme is tailor fitted for senior citizens who want to convert part of the equity in their homes to cash. These homeowners borrow against the value of their home and in return, receive an amount of money in lump sum, fixed monthly payment like pension, or line of credit. The entire loan balance becomes due when the borrower dies, moves away permanently, or sells the property.

National Home Mortgage Finance Corporation (NHMFC)

As part of the Philippines’ effort to provide affordable house and lot  to Filipinos was the establishment of the NHMFC in 1977 by virtue of Presidential Decree 1267. The primary mandate of this government corporation is to increase the availability of affordable mortgage loans to finance the Filipino homebuyers through the development of and operation of a secondary market for home mortgages.

Pagtutulungan sa Kinabukasan: Ikaw, Bangko, Industriya at Gobyerno (Pag-IBIG)

Another means of the Philippines Government to address the need for a national savings program and an affordable house and lot financing for the Filipino workers, the Home Development Mutual Fund (HDMF), more popularly known as the Pag-IBIG Fund, was instituted on 11 June 1978 by virtue of Presidential Decree No. 1530.

Recognizing HDMF’s contributions through the years and the need to further strengthen its capability as the biggest source of housing finance in the country to date, President Gloria Macapagal-Arroyo signed into law Republic Act No. 9679 or the Home Development Mutual Fund Law of 2009. The law was signed on 21 July 2009. Under the new HDMF law, membership to the Pag-IBIG Fund is made mandatory for all SSS and GSIS-covered employees.

Read Also: A Guide to your Housing Loan Options: Pag-IBIG or Bank Loan? | Affordable House and Lot: Pag IBIG’s Special Housing Loan Restructuring Program 2

Aside from the above-mentioned government corporations, there are also available mortgage loans from private and public financial institutions, like in UnionBank, Security Bank, Philippine National Bank, LandBank of the Philippines, among others. These banks offer different types of mortgage loans thus, as someone seeking for the best financing terms, you must be able to explore numerous opportunities available – may it be government aided funding through a private financial institution.

Though owning your dream home is oftentimes challenging especially in meeting its financial responsibilities, someone who is equipped with the right information in terms of how to address this impediment through various mortgage loan types will surely have an advantage and means to overcome it.

Bria Homes, one of the leading housing developers in the Philippines, will surely help you achieve your dream home with its affordable payment terms. Contact Bria Homes’ broker to know more or send us email at [email protected].

Read Also: Different Types of Bank Loans in the Philippines | Bria Homes in Partnership with AllBank for a Webinar on a Guide for OFWs Applying for Housing Loans in the Philippines