Since about three years ago, leading Hong Kong property developers have been offering mortgage loans for homebuyers to counter tighter mortgage rules that banks have to observe.
The Hong Kong Monetary Authority (HKMA) has introduced eight rounds of countercyclical measures since 2009 in order to contain the risks to the banking system.
Under the new rules, the maximum loan to value ratio was lowered to 50 percent for homes worth above HK$10 million. and homebuyers could only borrow 60 percent of the property value from banks for homes worth below HK$7 million.
Meanwhile, the monthly repayment is not allowed to exceed 50 percent of a homebuyer’s income.
HKMA wants to make sure that only well-financed homebuyers are able to get into the market, to prevent any potential shock to the financial system.
Amid this situation, developers began introducing their own mortgage plans to fill in the market gap to boost sales.
Most of the mortgage plans offered by them have quite relaxed rules in terms of income test and stress test. Also, they often offer loans of up to 90 percent of the property’s value, or even 100 or 120 percent if the homebuyer meets certain requirements, not to mention other incentives like no repayment in the first year and interest discounts.
But these generous terms typically only last three years or so, after which tougher terms kick in.
Borrowers of such mortgages may either have to pay a higher interest rate going forward, or they have to refinance their properties.
But to refinance with a bank, given the tougher HKMA mortgage guidelines, these borrowers may not qualify, particularly when the property market is showing signs of cooling and banks are getting more conservative with property valuations.
Builders offering financing to buyers accounted for 17.4 percent of total mortgage deals for new flats from April to June, according to data from mReferral Mortgage Brokerage Services.
This article appeared in the Hong Kong Economic Journal on Oct 10
Translation by Julie Zhu
[Chinese version 中文版]
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