Prudential Supervisory Measures for Mortgage Lending
As the risk of overheating in the property market has again risen recently, the Hong Kong Monetary Authority (HKMA) issued today (Friday) guidelines to banks on a new round of prudential supervisory measures on property mortgage business to strengthen banks’ risk management and resilience. The measures are as follows:
First: In stress-testing mortgage applicants’ repayment ability, banks are required to assume a mortgage rate increase of 300 basis points, instead of the existing 200 basis points. This measure shall apply to mortgage loans for all types of properties, including residential as well as commercial and industrial properties.
Second: The maximum loan-to-value (LTV) ratios of mortgage loans for all commercial and industrial properties, whether or not for self-use, shall be lowered from the existing applicable levels by 10 percentage points.
Third: The maximum LTV ratio of mortgage loans for standalone car park spaces shall be set at 40% and the maximum loan tenor at 15 years. Other requirements on maximum LTV ratio and debt-servicing ratio applicable to commercial and industrial property mortgage loans shall also apply to standalone car park space mortgage loans.
The above measures take effect immediately. However, loan applications in respect of property transactions with provisional sale and purchase agreements signed on or before 22 February 2013 will not be affected.
Besides, to further enhance the risk management of banks in Hong Kong, the HKMA has decided to introduce a risk weight floor of 15% for all residential mortgages granted tomorrow or thereafter by banks using the internal ratings-based approach.
Mr Norman Chan, the Chief Executive of the HKMA, said, “Hong Kong is facing an extremely unusual macro-monetary environment. The ongoing quantitative easing by advanced economies is unprecedented in both scale and duration. Interest rates have been artificially maintained at extremely low levels, and we see huge volumes of liquidity flow into emerging markets like Hong Kong. The current unusual circumstances are one of the main drivers for the prolonged boom in the local property sector. The risk of over-heating in the property sector to financial stability in Hong Kong is no smaller than that seen in 1997. We should note in particular that while mortgage rates were generally over 10% in 1997, after the burst of the property bubble, US interest rates have fallen, and mortgage rates in Hong Kong have spiralled down reaching about 2% in 2004. The situation we faced now is just the opposite. Mortgage rates are around 2%. And, even if the low interest rate environment were to remain until 2015 as anticipated by the US Federal Reserve, the US interest rates are bound to head back to more normal levels. Will mortgage borrowers in Hong Kong then be able to withstand the impact of interest rate hikes and property price falls? For example, under a 30-year mortgage, even though the borrower will be able to enjoy a low interest rate in the first two years, the repayment burden could become much heavier as a result of interest rate hikes in the years that follow. This could have serious consequences for the well-being of those families in the coming years. Therefore, I hope that the public will be cautious and should not underestimate the risks that rising interest rate could have on repayment ability, asset prices and the overall economy in Hong Kong.”
Hong Kong Monetary Authority
22 February 2013