As Hong Kong property prices top the world, expense on mortgage repayment remains a heavy and long-term burden on many Hong Kong citizens. The Consumer Council’s survey revealed that even though the residential and car park mortgage plans from different banks appeared more or less the same, their total interest expenses could vary a lot due to different mortgage rates. Taking the prime rate mortgage plans of different banks as an example, the actual rates ranged from 2.5% to 2.95%. As repayments would span over a long period of time, the total interest expenses after 20 or 30 years could differ greatly. Consumers should also note that, for mortgage plans in general, late repayment incurs handling fee and/or penalty interest. Home buyers should cautiously assess their own purchasing power, current and future expenditure as well as the stability of cash flow to avoid oversight.
The Council enquired about information on residential and car park mortgage plans from 20 local banks last month. With the exception of one bank that opted against participation and another that was not available for comment, the survey reviewed 78 mortgage plans (from 18 banks) and covered mortgage plans such as prime rate mortgage plans, Hong Kong Interbank Offered Rate (HIBOR) mortgage plans, mortgage insurance programmes, as well as government housing and car park mortgage plans for analysis.
The Pros and Cons of Prime Rate and HIBOR
Mortgage plans in Hong Kong can mainly be categorised into 2 types, namely prime rate mortgage plans and Hong Kong Interbank Offered Rate mortgage plans. Prime rate (P) is the rate at which banks usually grant loans to their most creditworthy clients. Each bank can set its own prime rate and publish the rate on its website. For prime rate mortgage plans, the mortgage rate is calculated by P minus a certain percentage, with no interest rate cap set. Compared with HIBOR mortgage plans and mortgage insurance programmes, prime rate mortgage plans are applicable to a larger number of property types. HIBOR (H) refers to the rate at which inter-bank loans in Hong Kong Dollars are made for different loan periods and is calculated and published by the Hong Kong Association of Banks every day. As H is subjected to changes such as capital flows in the market, it tends to fluctuate more than P. For example, when there is a shortage of market capital, the cost of inter-bank loans increases, thus increasing H. For HIBOR mortgage plans, the mortgage rate is usually calculated by H within a period of 1 month plus a certain percentage.
Taking the relevant interest rates on 16 August 2021 as an example, the actual interest rates of 14 prime rate mortgage plans ranged from 2.5% to 2.95% (with base rates ranging from P-3% to P-2.3%). Those of HIBOR mortgage plans, on the other hand, ranged from 1.36% to 1.71% (with base rates ranging from H+1.3% to H+1.65%). Assuming that the mortgage rate remains unchanged throughout the loan tenor, for a property valued at $8 million with a term of 25 years, the total interest expenses of the maximum P mortgage rate (2.95%) and the minimum P mortgage rate (2.50%) on the same day could differ by 20% ($3,321,020 and $2,768,577 respectively). The total interest expenses of the maximum H mortgage rate (1.71%) and the minimum H mortgage rate (1.36%) could also differ by 27% ($1,838,137 and $1,442,197 respectively). Comparing the minimum P mortgage rate (2.50%) with the minimum H mortgage rate (1.36%), the difference is almost one-fold (92%).
Beware of the Risks in Mortgage Plans for Properties under Construction
Many consumers choose to purchase properties under construction in Hong Kong and many developers provide cash payment plans and stage payment plans for potential buyers to choose from. Some developers even devise high loan-to-value (LTV) ratio mortgage plans on their own or partner with other financial institutions to facilitate prospective buyers who are short on down payment to purchase properties. However, consumers should carefully consider the pros and cons of such plans as the total expenses could vary to a great extent.
To cash out as early as possible, many developers offer more discounts to buyers of cash payment plans. However, consumers should note that mortgage insurance programmes are not applicable to properties under construction and valued at $6 million or above under cash payment plans. As the LTV ratio is hence lower, the amount of loans may decline significantly. Buyers, therefore, must prepare more capital for down payment. For a property valued at $10.77 million, banks can only offer an LTV ratio at 60%. The down payment of cash payment plans (about $4.32 million) is 1.2 times (about $2.37 million) more than that of stage payment plans (about $1.95 million).
On the other hand, buyers of stage payment plans enjoy fewer discounts and can only apply for mortgage loan after the completion of properties. If property prices plummet after the purchase of uncompleted properties, at completion of properties, banks may undervalue the properties i.e. estimate properties at a lower value than buyers have to pay, thus requiring buyers to prepare extra capital for down payment.
As for mortgage plans from developers, the LTV ratio can usually reach as high as 80% to 90%. Borrowers may not be required to undergo stress tests. Special arrangements on repayment, e.g. repaying interest only for the first few years or exceptionally low interest for the first few years may also be provided. Although the entry barrier to these plans is relatively low, the subsequent mortgage rate may increase drastically to higher than the mortgage rates of banks in general. For example, some developers offer mortgage plans to let buyers purchase a property valued at $13 million at a lower down payment of 20%. However, due to the larger amount of loans, in addition to the higher mortgage rate (0.75% higher for the first 3 years and 150% higher for the subsequent 22 years) than that of banks, the total interest expenses may be three-fold (over $6 million) more than those of banks.
Besides, prospective buyers should beware of other risks associated with the purchase of properties under construction, e.g. the lack of opportunities to inspect the units on-site, unsatisfactory construction progress or quality, late delivery of properties. Therefore, prospective buyers should not be enticed by attractive discounts into choosing mortgage plans on impulse. They should cautiously balance their personal finances and purchasing power to prevent any loss because of the rejection of mortgage application or short of funds for down payment due to reduction in loan amounts.
Handling fee and Penalty Interest
Apart from mortgage rates, consumers should also consider other handling fees and specific restrictions under certain plans. In general, mortgage plans usually levy a handling fee and/or penalty interest for late repayments, with the corresponding handling fee ranging from 2% of the repayment (a $100 minimum charge) to $500 for each late repayment (plus extra legal fees). As for penalty interest, most plans calculate it based on prime rate plus a certain percentage, ranging from P+0.5% to P+8% (daily interest, with a $100 minimum charge). Individual plans compound penalty interest daily and/or set a minimum charge. For example, in the case of a bank that imposes a 17% penalty interest per annum on late repayment instalments, the penalty interest approximates to $420 for a 30-day-overdue monthly repayment of $30,000. Consumers should repay on time to avoid additional financial burden due to handling fee or penalty interest.
Consumers should also beware of banks imposing handling fees upon mortgage application. Some banks impose a handling fee on borrowers for the cancellation of mortgage application after they sign the mortgage agreement or notice, with the amount of handling fees ranging from 0.1% of the loan amount (a $2,000 minimum charge) to 0.5% of the loan amount (an $8,000 minimum charge).
Mortgage Insurance Programmes and Deposit-linked Mortgage Plans
According to the Hong Kong Monetary Authority’s guidelines, the maximum LTV ratio of properties valued below $10 million was capped at 60% (a maximum loan at $5 million) while that of properties valued above $10 million at 50%. Those who choose mortgage insurance programmes offered by the HKMC Insurance Limited (HKMCI) can increase the maximum amount of loan to 90% of their property value. However, prospective buyers should beware of restrictions on applications, as well as whether their preferred banks offer individual mortgage insurance programmes.
As the mortgage repayment period usually lasts for 20 to 30 years, the borrowers’ interest expenses may increase when their repayment coincides with an interest rate hike of a cycle. 14 banks offer a total of 19 deposit-linked mortgage plans. Under all these plans, the deposit rates of the deposit accounts equal the mortgage rates of the corresponding mortgage plans. No minimum deposit is set and the maximum deposit ranged from 50% of the outstanding loan (or $2 million, whichever is lower) to 60% of the outstanding loan. However, for deposits that exceed the upper limit, 10 plans calculate interest based on demand or savings deposits. 8 plans do not pay interest, in which 3 of them even levy service charges for deposits.
Mortgages for Government Housing Schemes
Each mortgage plan or programme is suitable for different types of properties, regardless of prime rate, HIBOR and/or mortgage insurance programmes. In terms of mortgage plans for Government housing schemes,13 suitable for Home Ownership Scheme, 11 Tenants Purchase Scheme, and 4 other types of Government housing were found among replies. The vast majority of mortgages for Government housing schemes were set at prime rate. The actual mortgage rates of Home Ownership Scheme, Tenants Purchase Scheme, Green Form Subsidised Home Ownership Scheme and Sandwich Class Housing Scheme ranged from 2.5% to 2.95%, while those of the Hong Kong Housing Society’s Subsidised Sale Housing ranged from 1.46% to 2.5%. The maximum LTV ratio of Tenants Purchase Scheme was capped at 100% while that of the rest of Government housing ranged from 90% to 95%, with an average repayment period of 25 years at most.
Consumers who would like to purchase homes should pay heed to the following when choosing mortgage plans:
- Enquire about the procedures involved in home purchase and mortgage application, as well as the time and documents required in advance to improve one’s understanding of mortgage plans on the market and their corresponding assessment criteria;
- Assess one’s purchasing power, including future cash flow, financial burden and job stability cautiously and avoid borrowing to one’s limit when applying for mortgages in order to leave enough capital as a contingency fund;
- Compare the mortgage plans of several banks, e.g. mortgage rates, interest rate caps and different offers. Before application, develop a clear understanding of the terms and conditions and consider repaying using different methods, e.g. making monthly or bi-weekly repayments and beware of any differences between the amount approved by banks and the amount applied for.
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