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Negligible Differences Between Green and Traditional Mortgages Highlight Need for Real Incentives in Boosting Green Finance Development

  • 2023.04.17

The construction of green buildings is one of the key measures to combat global climate change. To meet the mortgage needs of green residential properties, many banks are offering green mortgage plans. However, the Consumer Council’s survey on 20 banks in Hong Kong revealed that only half of them (10 banks) offered green mortgage plans, and the interest rates of these plans were basically no different from traditional mortgages. The variety of perks touted looked extensive at first glance, but the actual benefits to consumers were insignificant. For example, 8 of the banks offered maximum cash rebates ranging from $6,888 to $12,000 for green mortgage plans, while 1 bank offered a cash rebate of only 0.1% of the loan amount, which is insignificant compared to the interest expenses of a full 30-year loan. Thus, when choosing a mortgage plan, home buyers should extensively compare the overall terms and restrictions, including interest rates and early repayment terms, instead of solely focusing on the offers of green mortgage plans. Otherwise, they may end up with a suboptimal mortgage plan.

Mortgage Properties Must be Certified “Platinum” or “Gold” Under the BEAM Plus Assessment

Compared to traditional mortgage plans, green mortgages have 2 requirements related to environment sustainability. Firstly, the property must obtain a valid Building Environmental Assessment Method (BEAM) Plus “Platinum” or “Gold” certification issued by the Hong Kong Green Building Council (HKGBC). Secondly, the whole process must be conducted online, from submission of mortgage application, uploading documents, checking the approval result, to the management of daily bills, so as to achieve a paperless practice and emission-reducing effect.

Hong Kong became the first city in Asia to introduce green building standards in 1996 and launched the HKGBC BEAM Plus in 2010, which sets a comprehensive set of performance criteria to assess the sustainable performance of buildings in different aspects. The highest rating is “Platinum”, followed by “Gold”, “Silver”, “Bronze” and “Not Rated”. According to HKGBC, 194 residential projects in Hong Kong, including private housing estates and subsidised housing, have been awarded Platinum or Gold ratings under the scheme. In the last 5 years, the number of residential projects certified at these 2 levels has been on the rise. If the Buildings Department can finalise and implement the newly recommended gross floor area (GFA) concession mechanism for newly-built projects within this year, new properties may be required to obtain a specified green rating in order to be granted GFA concessions, which will be an incentive for new residential projects to aim for a higher green rating and is expected to further boost the number of projects with high ratings.

Only Half of the Banks Offered Green Mortgage Plans

The development of green mortgage plans in Hong Kong is still in its initial stages. According to the results of the Council’s enquiries with 20 banks in Hong Kong from February to March 2023, only 10 of them had introduced green mortgage plans, which merely consisted of various special offers added on top of different traditional mortgage plans. Of these, 9 banks claimed they would accept green mortgage applications for first-hand existing buildings, first-hand uncompleted properties, or second-hand properties, as long as they met the “Platinum” or “Gold” rating in the BEAM Plus assessment. The remaining 1 bank indicated that it would only accept applications for first-hand properties with relevant rating certification. If needed, home buyers can apply for the Mortgage Insurance Programme (MIP) offered by the Hong Kong Mortgage Corporation Limited (HKMC) to obtain a higher loan-to-value ratio, lowering the threshold for home ownership. The maximum loan-to-value ratio can be up to 90% for those who meet the relevant criteria.

Green Mortgage and Traditional Plans Similar in Interest Rates, Only Touting Different Perks

It is a reasonable expectation of homeowners choosing a green mortgage to enjoy better terms than a traditional mortgage. However, the 10 surveyed banks that offered green mortgage plans only provided a variety of exclusive benefits, including cash rebates, shopping vouchers, airline mileage rewards, premium discounts, credit card annual fee waivers, and account upgrades, but none of them offered mortgage rates that were more favourable than traditional plans, and the concessions offered were not attractive enough as compared with long-term mortgage interest expenses. The Council reminds home buyers to focus on comparing the mortgage rates and overall interest costs, as well as the terms and conditions attached, when deciding which mortgage plan to choose.

In the property mortgage market, consumers can usually choose their loan calculation basis on either the prime rate (P) or the Hong Kong Interbank Offered Rate (HIBOR; in short, “H”) (simply known as “P plan” and “H plan”). “P” is generally the rate offered by banks to their most creditworthy clients, while “H” refers to the rate at which inter-bank loans in Hong Kong Dollars are made for different maturities. Take “P plan” as an example, the actual mortgage rates of 2 banks in this survey were 3.375% and 3.625% respectively. If an applicant purchases a $10 million property and takes out a 60% mortgage from the bank with a 30-year repayment term, the difference in monthly repayment between the 2 plans would be $837. In the long run, customers choosing the bank with a higher interest rate will pay over $300,000 more in total interest over 30 years than the bank with a lower rate. Similarly, when comparing the 2 banks with H rates of 3.375% and 4.13% respectively, the difference in monthly repayments would be $2,570 and the difference in accumulated interest over 30 years would be as high as $925,200. With this in mind, consumers must calculate and consider carefully.

In addition, whether a bank offers a corresponding mortgage-link loan scheme (also known as “high-interest account”) to successful applicants could also greatly affect the total interest expense, because customers can choose to deposit part of their idle funds into the high-interest account, earning interest to offset part of the mortgage interest expense, and effectively hedging against the risk of rate increase. Among the 10 banks surveyed, 8 of them offered such high-interest accounts; 6 of these offered preferential interest rates up to 50% of the property loan, among which 1 capped the maximum deposit at $2 million. The 2 remaining banks offered a maximum deposit amount up to 60% for a fixed term and then reduced it to 50%. However, these special offer terms are not exclusive to green mortgages. 7 of the surveyed banks had the same terms and conditions as traditional mortgage plans, with only 1 bank offering a maximum deposit of 60% of the loan amount for the first 3 years, which is higher than the 50% for traditional mortgage plans. However, for home buyers without much liquidity, these high interest accounts may not be very helpful.

When choosing a mortgage plan, home buyers may be attracted by cash rebates offered by banks. Out of the 9 banks offering additional cash rebate to green mortgage applicants, 8 had a maximum rebate amount ranging from $6,888 to $12,000. Assuming a $6 million loan amount, the maximum rebate received by the customer would only be 0.11% to 0.2% of the total loan amount. The remaining 1 bank offered an additional cash rebate equivalent to 0.1% of the loan amount. However, when comparing cash rebate offers, consumers should consider both the additional cash rebate for green mortgages and basic cash rebate offered by the bank. For example, if an applicant buys a $10 million property and takes out a 60% mortgage, 1 of the banks in the survey offered only $110 more in extra rebate than another bank, but $15,000 less in basic rebate, so consumers’ loss can be greater than the gain if they only compared the extra rebate without regards to the basic rebate when picking a mortgage plan. At the same time, banks placed different restrictions on cash rebates. For example, 3 banks stated that if a customer pays off the loan in full within 1 year of successful application for a mortgage, all cash rebates will have to be returned, so it is important for home buyers to understand the restrictions of relevant terms before considering early repayment of loans or refinancing the property.

Recommendations for Consumers and the Industry

Although many banks offer various incentives to green mortgage applicants, no matter they are cash rebates or discounts on other products and services, these may be insignificant compared to payments due to differences in the interest rates. The Council reminds home buyers to make extensive comparisons, carefully examine their personal and family’s financial situation, and fully assess their needs, paying particular attention to mortgage rates and relevant terms and conditions of different plans, rather than just focusing on the short-term extra perks offered by green mortgages.

The Council also encourages the industry to introduce more mortgage products related to green building, and to provide more substantial benefits and incentives. At the same time, the industry should also provide consumers with more information on the BEAM Plus assessment, to give them a better understanding of the actual differences between buildings with relevant certification and ordinary buildings. This could encourage consumers to purchase green buildings that meet higher environmental requirements, to the end of promoting and supporting the development of green mortgages, and to help enterprises build a better brand image, creating a win-win situation for both corporations and consumers.



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