Negative-equity relief on way
A homeowner caught in a negative-equity trap may typically pay up to HK$2,000 a month more for a mortgage loan than a borrower with an investment of positive equity in his property. In a worst-case scenario the penalty rate might rise above HK$2,500 a month.
The flip side of the same coin is that a lender to a negative-equity owner may be earning an extra HK$2,000 to HK$2,500 a month - or HK$24,000 to HK$30,000 a year - from a borrower likely to be least able to afford the premium.
As interest rates have tumbled this year, this payment gap has widened to the point where it is now opening a sharp divide between politicians and bankers.
The politicians want to be seen to be doing something to help increasingly cash-strapped negative-equity owners; the bankers complain that engineering quick-fixes to mortgage repayments is not the answer to problems in Hong Kong's property market.
This week's relaxation by the Hong Kong Monetary Authority of loan-value guidelines frees banks to lend up to 100 per cent of a property value, and will bring some relief to borrowers left under water by falling property prices caused by the 1997/98 Asian financial crisis.
In 1998, when mortgage rates were at their last peak of about 11 per cent, the monthly repayment on a HK$1 million mortgage repayable over 20 years was HK$11,321.88.
Today, falling interest rates and the mortgage price war between banks has brought that monthly repayment down to HK$5,421.66 (based on a mortgage rate of prime minus 2.75 per cent paid by a low-risk 70 per cent loan-value customer).
However, owners of properties whose market values have fallen below their original loan values could not refinance their loans at the new rates because until this week's relaxation that was outlawed by the HKMA guideline.
Typically, according to bankers, these home-owners may still be paying prime plus 1 per cent, though some critics - the Financial Secretary Antony Leung Kam-chung among them - feared that in some cases customers may still be paying prime plus 2 per cent or worse.
Take as an example a HK$1 million property on which a HK$700,000 loan was taken out back in 1998, but which has now fallen in value to HK$600,000.
If such a homeowner can come up with HK$100,000 with which to make an upfront payment, he can now raise a loan of HK$600,000 to refinance the old loan (which is 100 per cent of the new property value).
That will make sense if he gets the new loan at prime minus 1 per cent, say, as he could be saving about HK$1,000 a month (assuming he was paying prime plus 1 per cent for the old loan and prime minus 1 per cent for the new loan).
The HK$100,000 savings would be earning at best 1.3 per cent or so in a fixed deposit account - or about HK$108 a month.
Most banks are now examining the implications.
A Hang Seng Bank spokesman said yesterday that the bank would consider making 100 per cent loans to negative equity owners and would do so at below prime. Bank of East Asia said it would make such loans and pricing will be announced 'in a few days'.
Citic Ka Wah alternative chief executive officer and executive vice-president Doreen Chan said she supported the relaxation of guidelines, but warned that customers in this category should not expect 'very great' savings.
'We will extend loans of up to 100 per cent of the property value if the repayment history and ability is satisfactory,' she said yesterday.
'Our very lowest mortgage presently is prime minus 2.25 per cent, and on these loans I would look for a margin difference above that rate of maybe 0.75 per cent to 1 per cent,' Ms Chan added.
Homeowners free to refinance their old loans should now begin shopping around for the best deal.
Graphic: loan12gbz
