The Hong Kong Mortgage Corporation's Insurance Programme is an attractive and welcome scheme. But homebuyers should consider carefully the affordability of the properties they have in mind and their ability to service their mortgages. And, above all, they should look to the longer term.
As readers are aware, the Hong Kong Mortgage Corporation (HKMC) now operates a Mortgage Insurance Programme that has the effect of allowing the 44 banks participating in the Programme to make available to home-buyers mortgages of up to 90% of the valuation of the property.
For home-buyers this arrangement is obviously a welcome one, although they should carefully and objectively assess whether they are indeed in a position to service their mortgages if they can only come up with a 10% down payment. They must not over-extend themselves. The job market, although improving, is not exactly a stable one. Technological revolution is catching on in Hong Kong, and the reform and liberalisation of the Mainland economy, spurred on by its prospective entry into the World Trade Organisation, are a potent combination. While these factors augur well for Hong Kong in the long term, the structural changes in the short to medium term may be quite disruptive to those with more traditional and specialised skills. That is one important reason why Hong Kong's employment situation has not been improving as quickly as the economy itself, despite the keen competition for talent in information technology and financial services.
The property market is not exactly stable either, although the consensus seems to be that it is likely to do better rather than worse, as favourable factors, including the recent clarification of the Government's housing policy, outweigh the unfavourable ones. Whatever the case may be, home-buyers should obviously take a long-term view on the basis of affordability, rather than focus too much on the short-term volatility of property prices. It is, nevertheless, understandable that they would like to see the value of their flat, and indeed any other material things they own, always going up rather than down. But affordability, in terms of their ability to service their mortgages, is the real key to home ownership.
Affordability is also what the banks would look at, when they extend home mortgages, in the wider context of assessing the risk to which they are exposed. Risk management is the prime objective of the banks and, rightly, they are sticking to the practice of not going beyond 70% of the valuation of the property - a practice strongly endorsed by the HKMA. The additional amount of the loan of up to another 20%, making the total of 90% now available to home-buyers, does not involve any additional risks for the banks, for its repayment is guaranteed by the HKMC under the Mortgage Insurance Programme. The HKMC has, in turn, off-loaded most of the risk to Approved Re-insurers, so that its exposure in playing this useful role is also prudently managed. The 70% loan-to-value ratio, as a tool for risk management by banks in their mortgage business, is therefore very much still in force.
Who eventually pays the insurance premium charged by the HKMC is a matter to be decided by competitive forces in the market. With the banks very keen for mortgage business, they may offer to absorb all or part of it. As a result, home-buyers taking advantage of the arrangement do not really have to pay a significantly higher interest rate for the additional 20% of the mortgage, compared with what they have to pay for the other 70%. Indeed this appears to have been the outcome.
Greater competition among banks and the innovative Mortgage Insurance Programme of the HKMC are thus providing substantial benefits to home-buyers. And this is being achieved without significant additional risks being incurred either by the banks or by the HKMC. We seem to have a win-win situation here.
Joseph Yam
24 August 2000
More information about the Hong Kong Mortgage Corporation can be found here.
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