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The HKMC's 95 per cent mortgage insurance plan offers end customers more choice

In view of Hong Kong's weak economy in recent years, buying a flat is not as easy as it once was, and most young people find it difficult to save sufficient cash for the 10 per cent down payment.

The situation has been made worse by the government's move to cancel its home purchase loan subsidy schemes.

As a result, first-time homebuyers are opting for 95 per cent mortgage lending out of financial need, as it reduces their initial payout and lowers the entry barrier.

Some developers offer a second mortgage loan of up to 25 per cent of the property price.

But  second mortgages  usually come  with higher interest rates  - at prime rate (at present 5 per cent) to 2.5 per cent above prime - in order to cover  lending risks.

The recent Pan Asian Mortgage Company and Wing Hang Bank  alliance resulted in the launch of  the 95 per cent mortgage loan programme, comprising a 25 per cent second and a 70 per cent first  mortgage loan, at 2.75 per cent below prime.

The programme covers mortgage loans for both new and secondary properties,  with  4.5 per cent of the total loan amount  being incurred as a handling fee for covering the lending risk of the second mortgage offered by Pan Asia.

In some cases, this  fee may be as low as 3 per cent.

Responding to market needs, the Hong Kong Mortgage Corporation (HKMC)  last week launched its 95 per cent mortgage insurance plan,  offering  end customers in both property markets more choice.

Twenty-eight banks now offer  95 per cent mortgage loans. Their loan loss risks are  limited to a loan-to-valuation ratio (LTV) of 70 per cent, whereas insurance companies will indemnify the risks beyond that.

Depending on different loan tenors, floating rate mortgage loans with a LTV of 90 per cent to 95 per cent would adhere to a single premium payment of between  2.48 per cent to 3.98 per cent of the total loan amount.

With keen competition among bankers, mortgage rates are about 2.7 per cent below prime.

Such favourable  terms and interest rates will inevitably lead to the HKMC's new programme dominating the market's 95 per cent mortgages,  and end users will benefit   too.

Experience of the existing 90 per cent mortgage insurance plan  tells us that most borrowers would like to have both a mortgage loan and the insurance premium offered by bankers. Including a premium of 3.38 per cent (applicable for a 20-year  tenor with a floating mortgage rate), actual LTV for the new  95 per cent mortgage loan will be more than 98 per cent.

A negative equity scenario could easily occur  if property prices were to drop by 2 per cent.

The HKMC and  participating bankers and insurance companies must be very positive about  the current  state of the property market - believing that it is unlikely to decline in the near future -  otherwise they would not have been so quick to launch the 95 per cent MIP.

But despite such  confidence, potential homebuyers are  advised to base their purchasing decisions on their own needs (be it for investment or for self use) and financial situations.

'Conforming loan criteria' will be applied to all loans approved in the 95 per cent mortgage insurance plan, which means all  loans will have to be subject to the loan purchase criteria stipulated by the HKMC and the investors.

Compared with a routine loan application made through the bank,   terms of  loan approval   for the new programme are much stricter.

Borrowers should take note of the following:

Shell company applicants will not be accepted.

Rental property will not be accepted.

Age of property plus  loan tenors must be less than  40 years.

Self-employed applicants, except for professionals (that is, certified practitioners in medical, legal and accounting fields), will not be accepted.

Monthly debt (mortgage and other loans) to income ratio must be less than  45 per cent for loans with a maturity period of more than 25 years.

Both the property valuation and loan applications under the 95 per cent mortgage insurance plan must be approved by the processing banker and the HKMC, and applicants are required  to ensure sufficient time is made available for this procedure.

Applicants with an unstable income and those seeking mortgages for properties under rush sales and purchase transactions are not advised to join the mortgage insurance plan.

Also, both the valuation of the mortgaged property and applicant's credit  rating will affect the final  loan amount approved, so borrowers  should reserve some cash to top up any shortfall that might occur.

As a backup, borrowers might also consider going through other 95 per cent mortgage lending channels and obtaining approval from bankers for the same loan.

Hendrick Leung is director of Ricacorp Mortgage Agency



Favourable mortgage plans open doors for new buyers