10 March 2017 - Mortgages offered by developers hit headlines in June 2016 when Sun Hung Kai Properties offered Hong Kong homebuyers a mortgage of up to 120% provided that borrowers pledged their existing property as security. This prompted a public statement from Arthur Yuen - the Deputy Chief Executive responsible for banking in the Hong Kong Monetary Authority, who cited systemic “credit risks faced by banks” as a cause for concern since developers borrow extensively from banks. More aptly though, he addressed the inherent risk of defaulting and negative equity faced by individual buyers who opted for developer mortgage schemes. So why would anyone take on a mortgage from a developer as opposed to a banking institution?
Developer mortgage schemes address a shortfall within the Hong Kong real estate market, namely:
- buyers without sufficient savings to make the initial down payment
- buyers who fail to meet banks’ lending standards and the attendant mortgage stress test and income proof
- buyers who own existing mortgaged property and are looking to upsize but are unwilling to sell and require developer loans to act during the bridging period.
This taken in conjunction with the Hong Kong Monetary Authority’s decision to tighten the Loan-To-Value ratio for bank mortgage loans in 2015, the recent introduction of the Ad Valorem Stamp Duty in 2016 as well the stratospheric increase of Hong Kong property prices which rose 12.39 per cent year-on-year despite government cooling measures, has led to an increasing reliance by buyers on developer promotion schemes. According to mReferral Mortgage Brokerage Services, buyers taking out mortgages from developers constituted 22 per cent of the primary market in February 2016 compared to just 3 per cent back in November 2015. As a consequential effect of this, as of May 2016, the number of negative equity cases have risen 14 fold in the first quarter of 2016.
Under the current regulatory regime, banks are only allowed to lend up to 60 per cent of a home’s value in a mortgage for flats worth less than HK$ 10 million. A mortgage cap of 50 per cent is applied to a property costing more than HK$10 million and a cap of 40 per cent is applied to applicants with income derived outside of Hong Kong. Though banks such as Standard Chartered allow applicants to borrow up to 90% of the property price, this is only applicable to regular salaried first time homebuyers under the Mortgage Insurance Programme for properties worth less than HK$ 6 million. Moreover, a 10 per cent down payment is still required. Given that only an estimated 10 per cent of employed people in Hong Kong can afford a flat which costs within the range of HK$4 million to HK$6 million under current lending policies, developer mortgage schemes present the only viable option to those with their heart set on home ownership.
An ancillary effect of homebuyers without sufficient financing to qualify under current bank lending practices, is the petering out of demand in the secondary market and a resurgence of demand in the primary market. New home sales rose by 48 per cent in January 2017 compared to December and constituted 30 per cent of total sales for 2016 despite the fact that housing units available on the secondary market dwarf units stemming from new developments.
Though mortgage loans offered by developers may seem like an attractive alternative to those offered by banks, as a buyer, if you are unable to qualify as a successful mortgage applicant for banks, your repayment ability is effectively in doubt. Unless you fully understand the terms and conditions, the inherent risks, and have sufficient income to repay the loan after the touted low interest period, developer mortgage loans are best avoided due to the high potential for borrower default.