First-home borrowers must read the fine print as the devil is in the details of Hong Kong’s relaxed mortgage entitlements

The Hong Kong government announced last Wednesday to relax the cap on the property value eligible for a mortgage loan with a maximum cover of 80 per cent loan-to-value (LTV) ratio from HK$6 million to HK$10 million (US$1.27 million). For mortgage loans up to 90 per cent LTV ratio applicable to first-time homebuyers, the maximum property value is fixed at HK$8 million, going up from the previous HK$4 million. The new measure is considered to be a “godsend” for first-time homebuyers. Let’s take a two bedroom flat of Whampoa Garden, a well-recognised middle-class estate currently valued at around HK$7 million, as an example. Originally, homebuyers should be paying HK$2.8 million as down payment. However, after the new measure comes into effect, it will require merely HK$700,000 to become a homeowner in such a blue chip estate, while this amount was previously barely enough to buy a nano flat in the New Territories. Based on an effective mortgage rate of 2.625 per cent on a 30-year loan, the monthly mortgage payment amounts to around HK$25,000, which is quite affordable for a two-income household. Best of all, homebuyers used to spend up to half of their monthly income on mortgage payment and before that, they have to pass the bank stress test. Under the new measure, the stress test can even be waived. However, one should not quickly jump on the bandwagon and rush to buy just because the dream house now becomes more affordable. Let me discuss the new plan at length as both the devil and the angel are in the details. Firstly, according to the government-backed HK Mortgage Corporation (HKMC), the stress test waiver only applies to first-time homebuyers. The definition of first-time homebuyers does not literally refer to his/her first time of buying a property. It means that the buyer is not currently owning another property. If the borrower sells his/her existing property and buys a new one, he/she will still be qualified as a “first-time buyer”, even if the sale of the first property is yet to be completed. However, there is a lesser-known requirement. If the borrower does not have sufficient income to fulfil the 50 per cent debt-to-income ratio (DTI), he/she is required to have a guarantor, and if the guarantor has an existing mortgage, HKMC will still apply the stress test for mortgage approval. In other words, if the borrower or guarantor has another existing mortgage (regardless of whether it is a residential property, a commercial property or a car park), they have to pass the stress test which can be up to 35 per cent or 45 per cent DTI for LTV above 70 per cent, depending on the home price, which is not easy to pass. For example, if the borrower needs to borrow 80 per cent for a HK$8.34 million flat, and he/she or the guarantor has another existing mortgage, the bank stress test will require the monthly payment to not exceed 35 per cent of the borrower’s monthly income at 2.625 per cent mortgage rate, and to not exceed 45 per cent of income at 5.625 per cent mortgage rate. The stress test for borrowers with existing mortgages is harsher than those without existing mortgage. The latter only requires 50 per cent to 60 per cent of DTI to pass. Furthermore, even if the borrower is a first-time buyer and does not have a guarantor, the banks’ stress test waiver is not necessarily guaranteed. Even though HKMC backs such a waiver, most banks still shy away from completely ignoring the stress test in mortgage applications. With the stress test exclusion, banks will take on higher delinquency risk and have to raise their loan-loss provision to compensate. In fact, the Hong Kong Monetary Authority (HKMA) said in a statement that it “does not consider it appropriate to relax the countercyclical macroprudential measures at this juncture.” As a result, if any reader is planning to buy a property without sufficient income to pass the stress test, we suggest you first apply for a pre-approval from banks before signing any sales and purchase agreement with the seller. Another important point to note is that if the borrower goes for the 90 per cent LTV, only the fixed part of the salary will be counted in the 50 per cent DTI requirement and the stress test. For example, if the borrower earns most of his/her income by commission, most likely he/she is not eligible for a 90 per cent loan. One further constraint with the new LTV ratio is that it cannot be applied to refinancing existing mortgage with cash out. Raymond Chong is managing director at mortgage referral brokerage firm StarPro Agency