Key Information

inSight
Speeches
Speeches by Speaker
Norman T.L. Chan
Peter Pang
Eddie Yue
Arthur Yuen
Zeti Akhtar Aziz
Raymond Li
Edmond Lau
Esmond Lee
Meena Datwani
Vincent W.S. Lee
James Lau
Joseph Yam
Y K Choi
William Ryback
David Carse
Tony Latter
Andrew Sheng
Hans Genberg
Simon Topping
Michael Taylor
The Honourable Donald Tsang
Chen Yuan
Dai Xianglong
Don Brash
Jaime Caruana
Andrew Crockett
Mario Draghi
David Eldon
Stanley Fischer
Timothy F. Geithner
Stephen Grenville
Kenneth G. Lay
William McDonough
Ernest Patrikis
Glenn Stevens
Jean-Claude Trichet
Tarisa Watanagase
Zeti Akhtar Aziz
Carmen Chu
Alan Au
Press Releases
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Press Releases by Category
Bogus Voice Message Phone Calls
Banking in Hong Kong
Fraudulent Websites, E-mails and Telephone System, and other fraud cases
Granting of Banking Licences
Exchange Fund
Table of Multiples of Notes and Payments for Allotted Amount under non-competitive tender
Table of Multiples of Notes and Payments of Application Amount under non-competitive tender
Tender of Exchange Fund Bills and Notes
Tender Results of Exchange Fund Bills and Notes
Tentative Issuance Schedule for Exchange Fund Bills and Notes
Appointments and Departures
HKMA Pay Review
HKMA Publications
Speeches
The Hong Kong Mortgage Corporation
Hong Kong Note Printing Limited
Hong Kong Institute for Monetary Research
Exchange Fund Investment Limited
Others
Hong Kong Financial Infrastructure
International Relations
Investment Products Related to Lehman Brothers
Monetary Policy
Notes and Coins
Renminbi business
Credit Card Lending Survey
Monetary Statistics
Residential Mortgage Survey
Year 2000
Others
Guidelines and Circulars
Guidelines
Circulars
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
515.5995

Guidelines & Circulars

Our Ref.: B1/15C

30 October 2009

The Chief Executive
All Authorized Institutions

Dear Sir/Madam,

Best lending practices for residential mortgage loans

As mentioned in my letter of 23 October 2009 on prudential measures for residential mortgage loans (RML), the HKMA has recently completed a round of thematic examinations on asset quality of selected authorized institutions (AIs), covering in particular, their residential mortgage lending business. This letter sets out the best practices on residential mortgage lending we observed in the thematic examinations. AIs are required to review and assess their lending practices, and where necessary, take immediate measures to bring them into line with the best practices described in this letter.

Computation of debt servicing ratio (DSR)

While AIs were generally in compliance with the HKMA's guidance on a DSR ceiling of no higher than 50%-60% (with the upper end of this range confined to high income earners only)1, different methods were adopted in computing the DSR, resulting in some cases where the DSR was understated. To ensure prudent computation of the DSR, AIs should adopt the following practices:

  • Rental income should be included as part of the borrower's income (i.e. included in the denominator in computing DSR) rather than netted off against the corresponding mortgage payments.
  • A discount of at least 20% should be applied to the gross rental income to account for associated expenses (e.g. maintenance cost, property rates, management fees and property tax) and the period when the property is vacant.
  • All liabilities subject to regular repayment should be included (e.g. other mortgages, personal loans). Potential borrowers should be requested to declare all such liabilities in their loan applications and adequate checks and enquiries should be performed to ensure that this is the case. These may include checking with the consumer credit bureau or commercial credit bureau, or the borrower's main operating bank account. Proper records of such checks and enquiries should be maintained for review by internal audit or the HKMA.
  • AIs should have a definition of high income earners clearly defined if they have not already done so and should be able to justify why the threshold adopted is considered appropriate.

Income proof

Rental income claimed by the borrower should be supported by a properly executed tenancy agreement, rental receipt or relevant property tax return. Where this is not available, AIs should have procedures to assess whether the rental amount claimed by the borrower is reasonable by making reference to independent sources, such as rental valuation made by the Rating and Valuation Department or independent commercial websites providing such information. Where rental income proof is not available, AIs should consider whether the rental amount claimed by the borrower is acceptable and whether it is necessary to apply a discount higher than 20% as mentioned earlier to cater for the uncertainty of the rental income.

For borrowers who, by the nature of their occupations (e.g. freelancers, self-employed or sole proprietors), cannot provide objective income proof, AIs should establish clear policies on the types of income proof surrogate or proof of wealth that will be accepted, and document the methods and assumptions adopted in assessing / estimating the borrower's repayment ability.

Property valuation

We have identified the following best practices in respect of property valuation in our thematic examinations:

  • Where in-house valuations are used, there should be periodic checks against valuations done by outside parties to ensure that they are and remain prudent.
  • Independent valuation, where used, should be obtained from a panel consisting of at least of two outside valuers. Policies and procedures should be established to check that the valuation provided by the outside valuer is prudent and reasonable. Where the valuations provided by an outside valuer are consistently higher than those provided by other valuers, the AI should assess whether the valuation provided by that valuer continues to be reliable.
  • Regardless of whether a valuation is done internally or externally, AIs should exercise caution in making reference to isolated transactions where the price deviates substantially from prices of properties in the vicinity. In general, unusually high prices of isolated transactions or uniquely packaged properties may have little reference value and should not be relied on.
  • In respect of free valuation services provided to customers, AIs must ensure that the underlying valuation models and assumptions are adequately prudent. Although valuations obtained from these services are "for reference only", AIs should be mindful that there are potential property buyers and sellers who rely on these services as a major source of market information. Overly optimistic valuations may subject an AI to reputation risk.

AIs should endeavour to apply the best practices highlighted in this circular as soon as practicable, if these are not being done already. The HKMA will monitor AIs' progress in this regard through off-site review, which will be followed by another round of onsite examinations in the near future to ascertain AIs' compliance with the requirements set out in this letter and the earlier circular of 23 October 2009.

Yours faithfully,
Y. K. Choi

1The HKMA circular of 28 February 2005 on residential mortgage loans

Last revision date: 1 August 2011
ABOUT THE HKMA
The HKMA
Tender Invitations
Careers@HKMA
Legislative Council Issues
Links
The HKMA Information Centre
KEY FUNCTIONS
Monetary Stability
Banking Stability
International Financial Centre
Exchange Fund
PUBLICATIONS & RESEARCH
Annual Report
Half-Yearly Monetary & Financial Stability Report
Quarterly Bulletin
HKMA Background Briefs
Reference Materials
Research
MARKET DATA & STATISTICS
CMU Bond Price Bulletin
Economic & Financial Data for Hong Kong
Monthly Statistical Bulletin
Monetary Statistics
KEY INFORMATION
Press Releases
Speeches
Guidelines & Circulars
Forthcoming Events
inSight
OTHER INFORMATION
Information in Other Languages (Bahasa Indonesia, हिन्दी, नेपाली, ਪੰਜਾਬੀ, Tagalog, ไทย, اردو)
Account Opening
Consumer Corner
Consumer Education Programme
Complaints about Banks
Complaints about SVF Licensees
Internet Banking
Fraudulent Bank Websites, Phishing E-mails and Similar Scams
Be Careful of Bogus Phone Calls and SMS Messages
Authenticate the Callers and Bank Hotline Numbers
Register of AIs & LROs
Register of Securities Staff of AIs
Register of SVF Licensees
Investment Products Related to Lehman Brothers
Photo Gallery