As I wrote in “有樓有高潮、無樓咪白撞 (No property, no orgasm) ,” HongKongers are obsessed with buying property. So much that our anti-hero, 22 year old Season, says that no man could give her an orgasm unless he gives her a 2,000 sq. ft. luxury suite. On the other hand, our 25 year old celebrity single mother Whitney forfeited her half million deposit because her mortgage application was rejected by her bank. Flat buying is a risky business, so I want to write about what you should know before you seal the deal.
Disclaimer: The information here are for reference only. Please consult your mortgage consultant or banker for professional advice.
How much will the bank lend you?
The Hong Kong Monetary Authority allows banks to lend upwards to 60%:-
- For flats < HK$7m, banks can lend you up to 60%.
- For flats HK$7m to < HK$10m, banks can lend you up to 60%, capped at HK$5m.
- For flats HK$10m or over, banks can lend you up to 50%.
This might be a moot point, but banks might only lend 60% of their own valuation of the flat, and not necessarily 60% of the purchase price. So, if the property is overpriced, banks might not lend you the full 60%. They will stick with their own valuation.
What about secondary mortgage?
The Hong Kong Mortgage Corp. Ltd. (“HKMC“) allows banks to lend you a further 30%, bringing your mortgage to 90%:-
- For flats up to HK$4m, banks can lend up to 90%.
- For flats > HK$4m and < HK$4.5m, banks can lend up to 90%, capped at HK$3.6m.
- For flats HK$4.5m to HK$6m, banks can lend up to 80%, capped at HK$4.8m.
However, whether you will be granted the full 90% is subject to HKMC and the bank’s assessments. There is never a “guarantee” that you will get a 90% mortgage, even if property agents assure you that based on their “experience”, you will.
When will banks process your application?
Banks only officially process your mortgage application after you sign the agreement for sale and purchase (“SPA“). The SPA will generally provide that on signing, you will pay the seller a deposit, which might be HK$100,000, and later a further deposit, totally 10% of the purchase price. If your mortgage application is rejected, you will have no choice but forfeit your deposits plus agent’s full commission. Sellers will refuse to sign an SPA which is subject to a successful mortgage application.
What about the bank’s “pre-approval”?
HKMC may issue a “pre-approval” for your prospective mortgage application before you sign the SPA. The problem with this is that the “pre-approval” does not bind HKMC or the bank. HKMC reserves the right whether to approve your loan. Of course, having a “pre-approval” is better than not, because if granted, it means you have a good shot of getting the mortgage. But as with all mortgages, banks will do their own valuations and have their lawyers review title deeds before actually granting them.
What is the “stress test”?
The “stress test” is usually how the banks assess whether they would grant the mortgage loan. They will assess the buyer’s profession, salary, and total income, especially for a loan above 60%. For example, if interest rates increase by 3%, will repayments take up more than, say 60% of your salary? And if your income is based on commission (which fluctuates), banks will be hesitant. Banks will also consider the nature of your profession (i.e. stability) to assess your position to repay.
How much do you really need to save up?
How much you really need to save up depends on the price of the flat and your likeliness of passing the “stress test”. Like I said, it also depends on the bank’s valuation and title deeds. Banks won’t grant loans if the land title is “unclean.” For e.g., it is harder to get loans to buy “small houses” in NT’s indigenous villages (where titles are less certain) than new properties. Still, if you want to be foul proof, save up 40% and get a guarantor with ability to pay. Don’t forget stamp duty and lawyer fees.
Warning: If you’re buying a shell company holding the flat, not the flat itself, it’s very difficult to finance purchase of shares. Expect paying full price.
Trying to save up for a flat can be really stressful. Don’t lose your deposit that you spent years saving. And don’t believe in agents who “guarantee” that your 90% mortgage will be granted. But when people deter you with negative news about the property market, or how you’re chasing an impossible dream, stay positive, and keep the above in mind. Opportunities are for those who do their homework. I hope this post will make your journey a little less stressful.