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HONG KONG: The city's monetary authority has told banks to further tighten lending to buyers of luxury homes and investment properties on concern surging prices are getting out of hand.
The Hong Kong Monetary Authority (HKMA) has issued a circular to banks telling them to cut mortgage lending available to luxury-home buyers and property investors to 60% of a property's value from the current 70%. The tighter lending rules will apply to properties priced at HK$12 million (RM4.92 million) or more and those not for self-use. The same measures have applied to property valued above HK$20 million since last October.
"As property prices continue to rise sharply, the risks of residential mortgage loans are increasing," said Norman Chan Tak-lam, the chief executive of the HKMA. "Since mortgage loans constitute a major part of banks' loans, there is a need for the HKMA to introduce these measures to ensure the banks are managing their risks prudently."
For the first time, the authority has tightened mortgage loans for investment property. Regardless of the price, banks can only lend 60% of the value of these properties to the borrowers. Homebuyers will have to declare whether their property is for self-use or for investment.
Banks must limit the amount they advance to borrowers to ensure they do not spend more than 50% of their household income on mortgage repayments. The current limit is 60%.
Banks will also make sure borrowers would not have to pay 60% of their income on repayments in the event of interest rates rising two percentage points.
Chan said the affordability test was to prevent borrowers overstretching themselves.
"The interest rate is extremely low at the moment, which may encourage homebuyers to borrow more. This is risky because homebuyers should take into account their ability to repay when the interest rate returns to the more normal level. They should avoid overstretching themselves," Chan said.
HKMA deputy chief executive Arthur Yuen said studies showed if mortgage rates increased by two percentage points, borrowers' monthly repayments would rise 24%. If they opted to keep repayments at the same monthly amount, the interest rate rise would mean the loan repayment period would be extended by 11 years.
"If such a thing happens, some borrowers may need to spend 74% of their household income to repay mortgage loans," he said.
Yuen said property prices rose 3.5% last month to a level similar to the last property bubble of 1997. "We have to be cautious because the mortgage loans represent one third of all bank loans in the city," he said.
Yuen said that after the 1997 property market slump, many borrowers could only afford to repay their mortgage loans because they demanded their banks reduce interest rates. "But this time, mortgage loans are so low that there is no way the rate can go lower," Yuen said.
Meanwhile, the Hong Kong Mortgage Corporation said it would stop providing mortgage insurance for more than 90% of the value of a property.
HKMC chief executive James Lau said 25% of mortgage insurance applicants now apply for loans for more than 90% of the value of the property. The mortgage insurance programme run by the government-owned HKMC allows borrowers to pay a premium to get additional lending on top of the normal bank mortgage loan ceilings.
"When interest rates rise, those homebuyers may find it hard to shoulder the huge amount of mortgage debt," Lau said. The HKMC was suspending insurance for mortgages exceeding 90% lest it encourage homebuyers to borrow more than they could afford, he said.
Investment adviser KGI Asia's chief operating officer, Ben Kwong Man-bun, said the measures would help cool the overheating property market. "The HKMA measures will add to property speculators' costs and help to cool down the speculative activities. This will make the property market more stable." — South China Morning Post
The Hong Kong Monetary Authority (HKMA) has issued a circular to banks telling them to cut mortgage lending available to luxury-home buyers and property investors to 60% of a property's value from the current 70%. The tighter lending rules will apply to properties priced at HK$12 million (RM4.92 million) or more and those not for self-use. The same measures have applied to property valued above HK$20 million since last October.
"As property prices continue to rise sharply, the risks of residential mortgage loans are increasing," said Norman Chan Tak-lam, the chief executive of the HKMA. "Since mortgage loans constitute a major part of banks' loans, there is a need for the HKMA to introduce these measures to ensure the banks are managing their risks prudently."
For the first time, the authority has tightened mortgage loans for investment property. Regardless of the price, banks can only lend 60% of the value of these properties to the borrowers. Homebuyers will have to declare whether their property is for self-use or for investment.
Banks must limit the amount they advance to borrowers to ensure they do not spend more than 50% of their household income on mortgage repayments. The current limit is 60%.
Banks will also make sure borrowers would not have to pay 60% of their income on repayments in the event of interest rates rising two percentage points.
Chan said the affordability test was to prevent borrowers overstretching themselves.
"The interest rate is extremely low at the moment, which may encourage homebuyers to borrow more. This is risky because homebuyers should take into account their ability to repay when the interest rate returns to the more normal level. They should avoid overstretching themselves," Chan said.
HKMA deputy chief executive Arthur Yuen said studies showed if mortgage rates increased by two percentage points, borrowers' monthly repayments would rise 24%. If they opted to keep repayments at the same monthly amount, the interest rate rise would mean the loan repayment period would be extended by 11 years.
"If such a thing happens, some borrowers may need to spend 74% of their household income to repay mortgage loans," he said.
Yuen said property prices rose 3.5% last month to a level similar to the last property bubble of 1997. "We have to be cautious because the mortgage loans represent one third of all bank loans in the city," he said.
Yuen said that after the 1997 property market slump, many borrowers could only afford to repay their mortgage loans because they demanded their banks reduce interest rates. "But this time, mortgage loans are so low that there is no way the rate can go lower," Yuen said.
Meanwhile, the Hong Kong Mortgage Corporation said it would stop providing mortgage insurance for more than 90% of the value of a property.
HKMC chief executive James Lau said 25% of mortgage insurance applicants now apply for loans for more than 90% of the value of the property. The mortgage insurance programme run by the government-owned HKMC allows borrowers to pay a premium to get additional lending on top of the normal bank mortgage loan ceilings.
"When interest rates rise, those homebuyers may find it hard to shoulder the huge amount of mortgage debt," Lau said. The HKMC was suspending insurance for mortgages exceeding 90% lest it encourage homebuyers to borrow more than they could afford, he said.
Investment adviser KGI Asia's chief operating officer, Ben Kwong Man-bun, said the measures would help cool the overheating property market. "The HKMA measures will add to property speculators' costs and help to cool down the speculative activities. This will make the property market more stable." — South China Morning Post
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