Mortgage Insurance, available through banks from the Hong Kong Mortgage Corporation, enables borrowers to take out loans of up to 90% of the value of their residential property.
Following the Government measures to stabilise the residential property market, there have been calls for the relaxation by the HKMA of the 70% guideline for the loan-to-value ratio of mortgage loans extended by banks. These calls suggest that there is some misunderstanding of our prudential policy, particularly of how it affects the availability of mortgages to home buyers. There is a need, and indeed we have a duty, to explain this further.
It is important to distinguish between the percentage of the mortgage loan to the value of the residential property that is now available to borrowers and the percentage of the risk to the value of the residential property that banks are prudently prepared to accept. The 70% loan-to-value guideline - a misleading term, as it turns out - refers to the degree of risk that the banks should accept, not the percentage of the mortgage loan to the value of the residential property. The mortgage loan, at origination, can indeed be higher than 70% of the value of the residential property, as long as the bank is at risk only up to 70%. If the bank extends a mortgage loan representing, say, 90% of the value of the property, it has to offload the 20% excess risk to a third party. This can be done through the buying of insurance against any loss arising from default for that 20%. This insurance service has been available at a price through the Hong Kong Mortgage Corporation (HKMC) for some time now.
I have in the past few weeks spoken with quite a lot of our press friends and have sought their help in getting across a clearer picture of mortgage availability. We in the HKMA and the HKMC are also working with the banking community on this. The facts are quite simple and there is scope for simplifying the arrangements and making them more convenient to those buying their homes. For the many prospective home buyers in both the primary and secondary markets, who satisfy certain other prudential requirements largely common to the banks and the HKMC, mortgage loans of up to 90% are available from the banks. It has to be understood, however, that a 90% mortgage loan may involve higher risk than a 70% mortgage loan, for the simple reason that a buyer able to come up with 30% is of lower risk because the amount borrowed is less than one able only to come up with 10%. Prudent risk management requires that a slightly higher mortgage interest rate should apply to the 90% mortgage.
Currently, the mortgage interest rate is about 2.5% (prime minus 2.5%) for a normal mortgage loan of 70% of the value of the residential property. The mortgage interest rate for a 90% mortgage loan of, say, 20 years, if all of the insurance cost is passed on to the borrower and repayment is amortized over the life of the mortgage, is about 2.8% (prime minus 2.2%). This 0.3% premium in the mortgage interest rate may appear to be high to some and low to others. Some banks may choose to recover the premium over a shorter period, which would result in a higher mortgage interest rate in, say, the initial 3 years and a lower rate subsequently. Whether or not the premium is reasonable is for the market to determine. It may be that new insurers would find it attractive to enter the market to offer a lower insurance cost for the 20% risk. It may be that further development of the insurance sector in Hong Kong, or indeed the prospective recovery in the property market itself, would enable the cost of such insurance to be lowered. It may also be that competition among the banks would lead banks to absorb part of the insurance cost, though they should also remain alert to the need to ensure that the risk is properly priced.
Working closely with the banks, the HKMA and the HKMC stand ready to facilitate mortgage arrangements that are considered helpful to home buyers (the "one-stop 90% mortgage insurance service" is a good example), as long as the risk to the banks is limited to 70% of the value of the residential property.
Joseph Yam
5 December 2002
Related Viewpoint Article:
Mortgages, 24 August 2000
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