I received this question earlier this morning from a fellow forum member and blog follower (name withheld for security and privacy reasons):
“Hi Burn! I’d like to ask for advice if it’s ok with you. It’s about our plan to have a house of our own. We’re currently renting an apartment for P6,500/mo so we’re considering taking a Pag-ibig housing loan of 2M with a term of 30 years, 8% interest per annum and a monthly amortization of about P17,000. Actually, P17,000 is almost half of our monthly budget already so we’ll be sacrificing a lot, maybe even our monthly 20% allotted for buying stocks..
So do you think it is much better to just put the P17,000 monthly in stocks and just withdraw from it when it reaches 1-2 M? Maybe after 5-10 years given the interest is 10% p.a.? However, the prices of labor and materials might have gone up considerably by then..
The loan seems more attractive now as the house can be built with in 6 months to a year so we also won’t have to pay for the apartment rent once we’ve moved in..
(By the way, the 100 sqm lot on which to build the house will be given to us by my father, though we’d like to pay for it as well (P2,800 per sq) since we know they also need the money for their retirement..)
Please help as we’re really confused whether to just invest or apply for a loan and the kids are growing up fast. Thanks in advance.”
Here was my answer:
I am not an expert on real estate and property but let me just give you my thoughts and unbiased opinion.
Personally, I believe 30 years of repaying a P2M home loan/financing with annual interest of 8% and monthly amortization of P17,000 is just too long, too expensive, too costly assuming that you and your spouse are earning less than P70,000 per month. Your P2M loan spread out in a tenor of 30 years would translate to around P6M!!
Even after a year that the house has been constructed, the next set of worries will most likely pile up. You will have to start spending for its maintenance, taxes, insurance, and other fees and surprise costs while you continue to pay for your amortization with Pag-Ibig.
If you said you can save up P17,000 per month, then you can actually have your first million pesos in 5 years’ time. We’re not even talking about investing in stocks, earning through compounded interest, or dividends yet.
See my nerdy computation below:
P17,000 x 12 months x 5 years = P1,020,000
I don’t know what type or how big the house that you would like to have but if you will ask me, that P1,020,000 would be enough to build a decent one for a family of 5 or 6 even in year 2018. And then perhaps you can ask your father to give you another couple of years after that to save up for the payment of the lot (P280,000).
Price of cement back in 2010 was at P210 per 40kg bag. It went down to around P180 to P190 per 40kg bag in 2011-2012 but hiked back to around P200 to 230 per 40kg bag. So with the example of the cement, the price of some construction materials may vary from year to year. The cost of labor and materials and construction should not be a reason for you to worry later on.
I’ll give you an example below of a house built recently in the province for just around P300,000 (US$7,500)
My nerdy recommendation is that you set a saving and investment program for the house that you have been dreaming of for your family.
With that P17,000 monthly savings, you can either place it in a Balanced/Stock Fund mutual fund or UITF for 5 years and have it grow by at least 10% per year. Or again, simply continue saving up P17,000 or more per month for 5 years.
But before you do that, make sure that you already set aside at least one year worth of household expenses as emergency fund. I also hope that you and your spouse are insured as well.
How about you, what would be your advise to our inquiring blog reader?
To have a more professional and intelligent answer to your question, I’m inviting you to attend our Innovative Real Estate Investing tonight (May 2, 2013) at 10:00PM (Philippine time) featuring Ms. Maves Salva-Angeles of Happy Homes Realty Philippines.
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