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In Buying a Property, Which is Better: Pay in Cash or Take Loan?

In Buying a Property, Which is Better: Pay in Cash or Take Loan?

As OFW, I know some of you have purchased properties in the Philippines. Its either a parcel of land, a house, a condominium, a car or anything that requires a lot of money. For my case, I bought a condo property last 2009 which I am still paying up to now. Now I am wondering if I did the right thing of taking an in-house loan for the remaining 70% with 14% interest rate payable in 5 years, compare if I paid in full. Of course I don’t have the money to pay in full, but I just wonder if I did the right thing. So for my benefit, I made some computations to enlighten me. Hope this one also guide you in your decision of taking loans to buy a property or paying in cash.

The actual value of the property I bought last 2009 was Php 2,273,648.27. 30% of that was payable in 30 months with no interest. After that, I am left with a 70% remaining balance which I have the option of paying in cash or take loan from either bank or in house loan facility. That’s Php 1,591,553.79 remaining payables. I kept looking for lower interest rate that time, but seems I ran out of luck. Bank requires a lot of documents which I cannot secure that time. Same case with PAGIBIG loan. I ended up taking the 14% interest loan offered by the in house loan facility with no problem at all as they are the one who will process it.

I took the 5 years to pay loan, with monthly mortgage of Php 37.032.67. I issued post dated cheques to cover the 5 years payment. All in all after 5 years, I will be paying them a total of Php 2,221,960.20. That’s a Php 630K profit they will get from me out from the 5 years loan I took. A lot of money for sure.

But what if I have the cash, is it a good decision for me to pay the full amount of Php 1.6 M?

If I paid in full (for example only), I will save a total of Php 630K for sure.

However, If I will take the 14% loan and pay the monthly mortgages of Php 37K, I found it much better.

First of all, I am financial literate now and I know that my money can work harder than 14% annual interest. For the past 3 years, Philequity PEFI fund grows around 32.68% annually. It clearly shows that they beat the interest rate of my loan for nearly 3 folds.

cash

 (Here’s a Philequity PEFI fund annual growth in 3, 5 and 10 years time.)

mutual funds

 (Annual growth of a mutual fund is not guaranteed. Growth is subject to market volatility. It can be higher or lower in the future. Invest at your own risk.)

By using the annual growth for the past 3 years in a PEFI mutual and I invest my money first; at the end of 5 years it will be around Php 6 million. Compare that to the Php 630K I will lose in paying monthly mortgages.

In short, I got a good debt for my property. If you are considering taking loans, always make sure that you can beat the interest rate in an investment vehicle. There are lots of them available for you, you just need to study them and choose the best one that suits your need.

P.S. A year ago, I do not know anything about investment. Then I joined Truly Rich Club by Bo Sanchez. It was the best decision I ever made in my life. Brother Bo is a spiritual preacher and at the same time, financial literacy advocate whose purpose is to help people become rich in order to serve the LORD with the money that they have. He guided me along the way, explaining how I can manage my money and make it work hard for me. Now I’m investing in stocks and mutual funds and have a clear path for my future. Soon I’ll open UITF account as well. All are made possible by his guidance and teachings on every steps to become an investor. Being OFW isn’t forever, this is my EXIT PLAN. It’s amazing how his teachings change my life. I’m inviting you to join the club too, JOIN TRULY RICH CLUB. If you have any question, feel free to leave your comment below. CLICK HERE TO JOIN

About Richard Macalintal

Hi my name is Richard. I am a Registered Financial Services Consultant in Singapore. If you have any queries or you need help on your insurance policies and investment linked products, feel free to message me :-) We can have a cup of coffee while I do financial review and give advice with regards to your finances :-) Contact me thru email rlmacalintal(at)yahoo.com or SMS me +65 82235186. Disclosure: I am a Financial Consultant of AIA. The statements or opinions expressed on this site are my own and do not necessarily represent those of AIA.

4 comments

  1. True, it’s not always a choice we can make. But when we can, I’m sure paying in full will be the better option.

    I have to say though, in-house financing is usually pricier than loaning through a bank.

    I would also like to caution others that a 14% annual interest s not always beatable. We are in a pretty good bull market, so it’s doable right now. But stocks, forex and other very volatile investments are the only options that can beat 14% (or even say 11% for a bank loan).

    They don’t earn regularly, and if you’re caught in a bear market, you might have lost more money. So if there’s a choice, paying in full would still be the better option, even taking into account possible investment earnings.

    But again, we don’t always have a choice. So taking out that loan for our house and saving and investing is the best option we can take.

  2. I have an insight as well. Unless you really wanted to buy that condo unit, I think it was a wiser choice to invest the 30% downpayment which you paid for 30 months and the Php 37.032.67 you are paying now.

    If you put it in an investment with an effective annual return of just 20%, by the time you finished paying that 37K, you will get around 6 million pesos wherein you can use it to buy a bigger property in full.

    Condo unit appreciation is only around 3% a year during construction period and around 6% annually when it’s fully built.

    If you could only wait, you could have bought a nicer one compared to what you bought now.

    • i definitely agree with you Ron. it so happen that when i purchased the property last 2009, i was totally financially illiterate. all i want is to buy a property whatever it takes. anyway, 3 years more and this will be an asset for me generating cashflow monthly 🙂

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