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Choose a mortgage that suits your financial planning needs

If owning a house is a dream come true, selecting the most appropriate mortgage can be a downright nightmare - especially for the first-time buyer.

According to guidelines from the Hong Kong Monetary Authority, banks cannot provide mortgages of more than 70 per cent of a property's estimated value. The Hong Kong Mortgage Association will provide an additional mortgage, bringing the total amount up to as much as 95 per cent.

Most banks obtain insurance from the Hong Kong Mortgage Corporation. A few, such as Standard Chartered, have launched an alternative approach, relying instead on independent insurance providers.

'Mortgages themselves are a financial planning tool, not simply a property investment tool,' says Susanna Liew, general manager, mortgages and auto, at Standard Chartered.

'Both cash-flow requirements and net interest payments should be taken into consideration.'

The first step is to look at the actual interest payments and not the rate of interest charged.

'One of the common falsehoods is that interest rates equal interest payments,' Ms Liew says. 'That's why most people weigh the prime rate minus the value as the dominating factor when choosing mortgage plans.

'Without doubt, it would be decisive for interest expenses in the years to come. But don't forget that there are different factors affecting interest expenses other than interest rates. Loan amounts, the tenor and the frequency of payments are also key. So looking at interest rate alone can sometimes be quite misleading.'

The next step is to manage your cash flow.

'When the prime rate rises, monthly mortgage payments also increase accordingly,' Ms Liew says. 'Thus, the propensity to spend reduces. Some customers may choose to shorten their tenor and make partial payments, but this results in the loss of cash flow and in handling charges.'

New products can help borrowers control their interest payments and better manage their cash flow. Take, for example, a mortgage account with a savings linked feature.

'The mortgage interest of such products is calculated daily on the outstanding net balance or the outstanding loan amount, and the borrower can still enjoy the flexibility of cash withdrawals,' Ms Liew says.

Using a loan of $1.5 million and assuming a prime rate of 6.75 per cent and a tenor of 25 years, borrowers who come up with a deposit of $175,000 will enjoy monthly repayments of $3,500. They will pay less interest if the savings remain in the account until the end of the repayment period.

'It is recommended that you consult your financial consultant and conduct thorough financial planning before selecting a mortgage plan,' she says.