Mortgages at 90% loan-to-value ratio are already available to prospective homeowners with the assistance of mortgage insurance.
There seems to have been a revival of public interest in the prudential guideline on "70% mortgage". This is understandable, given the Government's declared intention, generally welcomed by the community, to stabilise and possibly boost property prices. We welcome Government initiatives on this, free market arguments notwithstanding, for the simple reason that the fall in property prices, by an average of over 60% in the past five years, may endanger financial stability in Hong Kong, if left unchecked.
We also welcome constructive comments on the prudential guidelines promulgated for safeguarding banking stability. But some of the comments, regrettably, reflect a continued misunderstanding of the actual situation, which is in turn an indication of the need for us and for the banks to explain more clearly and to promote further what is on offer. The term "70% mortgage" has in fact become a misnomer, ever since the introduction of top-up loans, over and above 70%, either by lenders outside of the banking system or indeed by the banks themselves, with the additional risk off-loaded through insurance arrangements. In other words, mortgages of, say, 90% of the value of the property have been available, in one form or another, for some time now, for residential property in both the primary and the secondary markets.
But, as the "70% mortgage" prudential guideline continues to be applied to the banks in respect of the risks they are assuming in their mortgage lending, there is the false impression that home-buyers have been prevented by it from getting 90% finance. This is not true. The simple fact is that many banks are now offering 90% mortgages. How they manage the risk in excess of 70% is a matter for them - they mostly do so by taking advantage of the Mortgage Insurance Programme run by the Hong Kong Mortgage Corporation. But this need not be a matter requiring the attention of the homebuyer. Recognising this, the one-stop 90% mortgage service was introduced in December last year to make it convenient for the homebuyer. Instead of the homebuyer arranging for and paying the insurance for the lending bank in respect of the additional 20%, the lending bank has been making all the arrangements, with the additional risk management costs built into the mortgage interest rate. And, with competition, the lending banks are in fact absorbing part of the insurance premium. One point which borrowers may overlook is that, even if the "70% mortgage" guideline is relaxed, it is highly likely that banks will charge a higher interest rate on a 90% mortgage than a 70% one to compensate for the additional risks involved.
The effective mortgage rate offered by a number of banks under the one-stop 90% mortgage service is now as low as prime - 2.25%, which is only slightly higher than the norm of Prime - 2.5% for a mortgage of up to 70%. Mortgage loans involving mortgage insurance run by the Hong Kong Mortgage Corporation increased from an average of 523 cases a month before the introduction of the one-stop service to 860 cases a month after. The market penetration ratio of these mortgage loans has also been increasing since the introduction of the service, from representing about 8% of all new mortgage loans before to, the latest figures show, over 15% in May this year.
Perhaps there are ways of further improving the service, through for example the streamlining of procedures. We will urge the banks to do so, if competition is not providing the incentive. Where this involves insurance through the Hong Kong Mortgage Corporation, the Corporation will process applications expeditiously and look for further improvements. Already, applications are processed within one to two business days after receiving the supporting documents. The fact that 90% mortgages are available for homebuyers from banks will also need to be further publicised. We look to the media for assistance on this. And we can leave the banks and the banking supervisor to worry about the technical arrangements concerning risk management.
Joseph Yam
7 August 2003
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