MANILA – More developers have been enticing buyers to purchase properties by no longer requiring them to pay the 20 percent downpayment.
However, financial adviser Salve Duplito said that what most people don’t realize is that the 20 percent downpayment rule is their protection from foreclosure, lightens mortgage, and reduces pressure on cash flow.
The downpayment requirement is also a litmus test of whether you’re financially ready to buy a house.
“Without a 20 percent downpayment, buying a house seems more achievable. But there’s a high likelihood that’s an illusion buyers will discover as the years go by. And the result of that illusion—foreclosure—can be very painful,” she said on ANC’s “On The Money.”
The aggressive selling strategy of waiving the 20 percent downpayment requirement is one of the factors in the US financial crisis in 2008.
The Bangko Sentral ng Pilipinas (BSP) is tightening its regulations regarding this strategy as well as other aspects of real estate lending in efforts to keep the country’s financial sector healthy.
“That is part of the regulatory review we are doing because we want to be sure that credit underwriting standards are being maintained,” said Dr. Johnny Ravalo, BSP assistant governor.
The BSP is also reviewing contract-to-sell financing deals of real estate developers.
Contract-to-sell financing is a scheme that involves removing downpayment, and allowing buyers to pay in installment but with a balloon payment within a couple of years.
The developer then sells the receivables to the bank.
Ravalo said the BSP has set a minimum standard of 1 year before a developer can sell the receivable to a financial institution.
“We are undertaking a new review whether it needs to be tightened a little bit more, given what we are seeing as the supply side of the market. An individual cannot simply go to the developer, get a unit, and then the developer next day turns around and sells it to the bank. It has to go to an aging process so there is track record that the individual has a capacity to pay. Only then, there’s a minimum period for that, can the developer go to a bank and try to sell,” he said.
The BSP is also tightening regulations in terms of prioritizing cash flow and capacity to pay rather than collateral in credit evaluation.
Ravalo also said that the regulator is tightening disclosure rules as well as monitoring data and compliance.
He added that demand for real estate seems to be less an issue now than before due to the country’s demographic.
The important signs that the BSP is looking at in real estate is the capacity of individuals to pay their loans; how well banks can find good borrowers; and what recourse a person has when he falls into financial distress.
“If you want to keep the economy healthy, stay away from those no downpayment deals, which make it harder overtime for you to pay off your property,” Duplito said.