Amortization and Loan Computations
Learn how to compute monthly amortization, understand interest calculations, and compare loan terms. Essential math for brokers helping clients with financing.
The Monthly Amortization Formula
“Every creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth: the amount of credit; all charges, individually itemized; the percentage that the aggregate of such finance charges bears to the amount of credit; and the specific dates of payments.”
What This Means
The standard formula for computing monthly amortization (fixed-rate loan) is: M = P × [r(1+r)^n] / [(1+r)^n - 1], where M = monthly payment, P = principal (loan amount), r = monthly interest rate (annual rate ÷ 12), n = total number of months. This formula produces equal monthly payments that cover both principal and interest. In early months, most of the payment goes to interest; in later months, most goes to principal. Filipino brokers should master this formula to help clients compare bank loan offers vs. Pag-IBIG vs. in-house financing.
- Formula: M = P × [r(1+r)^n] / [(1+r)^n - 1]
- P = loan amount (selling price minus down payment)
- r = monthly interest rate = annual rate ÷ 12
- n = total months (term in years × 12)
- Early payments: mostly interest. Late payments: mostly principal.
Real-World Scenario
A buyer takes a P3,000,000 housing loan at 7% annual interest for 20 years. The buyer wants to know the monthly amortization.
How much is the monthly amortization?
Comparing Loan Terms: Bank vs. Pag-IBIG vs. In-House
“The Home Development Mutual Fund shall provide its members with adequate housing through an affordable, accessible, and sustainable home financing program. Housing loans shall not exceed the maximum loanable amounts as may be prescribed by the Board of Trustees based on the member's capacity to pay.”
What This Means
Three main financing options in the Philippines: (1) Bank loans: lower rates (6-9% fixed for 1-5 years, then repricing), stricter requirements, faster processing. (2) Pag-IBIG Fund: lowest rates, and as of June 2026 the cheapest money on the market for most buyers: 3% under the socialized 4PH program if the borrower qualifies on income, otherwise a promo rate of 4.5% up to P4.9M and 5.75% from P4.9M to P10M, both fixed for 3 years, for applications received until 31 December 2026. Outside that promo the standard schedule runs higher and rises with the fixed pricing period. Maximum loanable amount is P10M (raised from P6M in June 2026), 30-year term maximum. (3) In-house developer financing: higher rates (12-18%), easier qualification, shorter terms (5-15 years), no bank approval needed. Always compute the TOTAL COST (monthly × months) to show clients the true difference between options, and always ask how long the rate is actually fixed for, because every one of these reprices.
- Bank: 6-9% interest, up to 80% LTV, 20-25 year terms, strict income requirements
- Pag-IBIG: 3% (4PH) or 4.5-5.75% promo to 31 Dec 2026, max P10M loan, up to 30 years, requires membership
- In-house: 12-18% interest, 5-15 years, easier approval, no bank processing
- Total cost = Monthly payment × Number of months: this reveals true cost
- Lower rate + longer term can cost MORE than higher rate + shorter term
- A quoted rate is only fixed for a few years: ask what happens at repricing
Real-World Scenario
A buyer needs P2,000,000 financing. Compare: Option A (Bank at 7% for 20 years) vs. Option B (Pag-IBIG at the 4.5% promo rate for 30 years) vs. Option C (In-house at 14% for 10 years).
Which option has the lowest monthly payment? Which has the lowest total cost?
Down Payment and Equity Build-Up
“The minimum down payment or equity requirement for housing loan availment shall be at least: For loan amounts not exceeding Two million pesos (P2,000,000). no minimum equity for Pag-IBIG members with at least twenty-four (24) months contribution. For bank loans, the Bangko Sentral ng Pilipinas requires a minimum loan-to-value ratio ceiling.”
What This Means
Down payment (DP) or equity is the portion paid upfront, not covered by the loan. Standard requirements: Banks require 10-20% DP (80-90% Loan-to-Value or LTV). Pag-IBIG allows 0% DP for qualifying members (up to P2M loan). Developers typically require 10-30% "spot DP" or "equity" spread over 12-36 months during construction. Computing the DP schedule: if 20% equity on a P5M property = P1M, spread over 24 months = P41,667/month during the equity period, THEN the loan amortization starts after. Help clients budget for BOTH phases.
- Bank LTV: 80-90% (meaning 10-20% down payment required)
- Pag-IBIG: up to 100% financing for qualifying members (≤ P2M)
- Developer equity: usually 10-30% spread over 12-36 months
- Equity period payments ≠ loan amortization (two separate phases)
- Reservation fee (P10K-50K) is typically applied to the DP/equity
Real-World Scenario
A P4,000,000 condo requires: P30,000 reservation fee, 20% equity spread over 24 months, and 80% balance via bank loan at 8% for 20 years. Compute the complete payment schedule.
What is the monthly payment during the equity period and during the loan period?
Frequently Asked Questions
What is the difference between a fixed-rate and variable-rate housing loan?
A fixed-rate loan maintains the same interest rate for a specified period (1, 3, 5, or 10 years), giving predictable monthly payments. After the fixed period, the rate "reprices" based on market rates. A variable-rate loan adjusts periodically (every quarter or year) based on a benchmark rate. Fixed rates are slightly higher initially but protect against rate increases. In the Philippines, most bank housing loans offer 1-5 year fixed periods, then reprice annually.
How do I compute the maximum loanable amount based on income?
Banks use a Debt-to-Income (DTI) ratio: typically, total monthly debt payments (including the new loan) should not exceed 30-40% of gross monthly income. Formula: Max monthly amortization = Gross monthly income × 30-40% - existing debt payments. Then reverse the amortization formula to find the maximum loan principal. Example: P80,000 income × 35% = P28,000 max payment. At 7%/20yr, this supports approximately P3,610,000 in loan principal.
What is the advantage of making extra payments on a housing loan?
Extra payments go directly to PRINCIPAL reduction, which reduces the total interest charged over the life of the loan. For example, on a P3M loan at 7%/20yr, paying an extra P5,000/month saves approximately P1,100,000 in total interest and shortens the loan by about 7 years. Check with your bank first: some loans have prepayment penalties (typically 2-3% of prepaid amount) during the fixed-rate period.