The Hong Kong Monetary Authority (HKMA) today (Monday) issued a circular to all authorized institutions (AIs) reminding them of the need to monitor carefully the risks associated with residential mortgage lending and setting out the treatment of cash rebates and interest/repayment holidays within the context of the 70% loan-to-value (LTV) ratio guideline (the 70% guideline).
The term "cash rebates" applies to lump sum payments, payments by instalments, and interest or repayment holidays offered to borrowers. The circular states that
- if a cash rebate is in excess of 1% of the loan amount of a residential mortgage, it should be treated as part of the loan amount for calculating the LTV ratio
- if a cash rebate is not in excess of 1% of the residential mortgage, there is no need for it to be counted as part of the loan amount. However, disbursement of the cash rebate should be made only after completion of the purchase of the property in question
- for residential mortgage schemes involving cash rebate subsidy offered by property developers, the lower of the discounted price or the valuation of the property should be used as the basis for calculating the LTV ratio. AIs should ensure that adequate disclosure regarding such schemes has been made to the borrowers in conformity with the spirit and objectives of the Code of Banking Practice.
"The HKMA has become increasingly concerned that the risks to which AIs are exposing themselves in the use of large cash rebates may not have been adequately considered by these institutions when competing for new residential mortgage business. This circular is intended to help promote prudent business practices and to set out the treatment of cash rebates within the context of the existing 70% guideline," said Mr William Ryback, Deputy Chief Executive of the HKMA.
The circular also reminds AIs of the importance of assessing carefully and prudently the repayment ability of mortgage borrowers, especially those who are seeking additional financing beyond 70% of the property value. Some guiding principles for calculating the debt servicing ratio are provided.
For further enquiries, please contact:
Kevin Ip, Manager (Press), at 2878 1687 or
Thomas Chan, Senior Manager (Press), at 2878 1480
Hong Kong Monetary Authority
28 February 2005