Mortgage Loans with High Loan-to-Value Ratios offered by Property Developers

(Translation)

The HKMA has been closely monitoring property market development.  Recently, we notice that property developers have launched different kinds of mortgage plans and promotion schemes with a view to attracting buyers for acquiring their newly-launched properties.

There is a great variety of mortgage plans and promotion schemes offered by the developers, including:

• Mortgage loans with a loan-to-value (LTV) ratio of as high as 80%, 90% or even 95% of the value of the property;
• An additional bridging loan by mortgaging the buyer’s existing property, making the total loan amount even higher than the purchase price of the newly-acquired property;
• Interest and repayment holidays in the first two to three years, or only a small amount of down payment, with full payment to be made only after the end of promotion period;
• Stress testing on the repayment ability of the potential buyer is not required, nor is any proof of income needed.

Buying a home is one of the most important decisions in life for many people.  As mortgage loans often span as long as 20 to 30 years, potential buyers should fully understand the terms and conditions of mortgage loans.  Even though the short-term carrot may look attractive, potential buyers should take into account any changes that may occur in the future, carefully assessing their repayment ability and making a shrewd and prudent decision.

In making a self-assessment, why not spend a few minutes considering the following questions:

1. Should property prices fall, the market value of property with high LTV ratios will likely become lower than the outstanding amount of mortgage loan.  As an example, should property prices fall by more than 10%, a property granted with mortgage loan with a 90% LTV ratio will be in negative equity.  Am I prepared for this?
2. What is the plan after the end of the interest and repayment holidays or low-interest period?  If it is planned to switch to a bank for mortgage loan with lower interest rate to complete the property transaction, the bank will assess the application based on the latest market value rather than the original acquisition price.  Should the market value of the property fall below the original acquisition price, the buyer may not be able to borrow enough money from the bank to complete the transaction.  Do I have extra funds to complete the transaction?  If the answer is NO, the down payment will be forfeited!  Can I withstand such risk?
3. The interest and repayment holidays, or the low-interest promotions, sound very tempting.  But, have buyers seriously worked out how much the mortgage repayment amount will increase after the end of the aforesaid promotion period?  As an example, assuming an interest rate of prime rate (P) minus 2.5% in the first two years and P for the rest of the term, a back-of-the-envelope calculation suggests that the total interest expense for the entire term may be more than double that under a bank’s mortgage.  What’s more, taking into account the normalisation of interest rates in the US, the current P level will go up gradually, meaning that the interest payable by the buyer will likely increase further.  Will I have enough money to cope with such ballooning repayment amount?
4. Some property developers target buyers who are considering replacing their existing homes by offering mortgage plans with a high LTV ratio.  Under such plans, a buyer will need to mortgage his/her existing property to the developer in return for an additional bridging loan.  If I am not able to sell my existing property during the transitional period as planned, can I bear the risk of a fall in market prices of both properties at the same time?
5. If, for stress testing or income-proof reasons, I cannot obtain mortgage from banks and therefore have to turn to the developer, after the promotion period ends, can I pass the stress test or provide sufficient proof of income as required by banks?

Purchasing a property is a major decision.  I do hope that the above questions can help potential buyers to make a comprehensive and long-term consideration, and to give more thoughts about the issues they may encounter when they need to eventually obtain a bank loan after the promotion period is over.

Finally, I would like to talk about the issue on property loans.  Currently, the amount of mortgage loans provided by property developers is still small, when compared with the total amount of residential mortgage loans provided by banks.  Having said that, it also comes to the HKMA’s attention that such loans provided by some individual developers have been increasing in multiples over the past year.   

The HKMA, being the banking regulator in Hong Kong, is committed to maintaining banking stability in Hong Kong and containing risks in the banking system.  While property developers are outside our supervisory ambit, the fact that banks lend to property developers which, in turn, provide mortgages to homebuyers, indirectly increases the potential credit risk faced by banks.  The HKMA considers this is a cause for concern, and therefore has been discussing with banks and studying the need of introducing appropriate measures with a view to strengthening the risk management of banks in respect of loans provided to property developers offering mortgage loans with high LTV ratios. 

Arthur Yuen
Deputy Chief Executive
Hong Kong Monetary Authority

20 June 2016