Banks are increasingly offering these loans because they are secured by the HKMC, but there are more efficient alternatives
Banks are introducing fixed-rate second mortgages in the market. This has nothing to do with the Hong Kong Monetary Authority relaxing its guidelines and permitting banks to offer top-up second mortgages over the 70 per cent loan-to-value limit.
Second mortgages have been a useful financing product available from most property developers to entice potential buyers of their flats. Now, second mortgages are being offered in the primary and secondary market by the Hong Kong Mortgage Corp (HKMC), a 100 per cent owned government company.
There is nothing new about the short-maturity fixed-rate second mortgage. Many banks have offered fixed-rate first mortgages with maturities of one to three years. The primary difference is that this second mortgage is being offered by the HKMC through selective banks. The banks retain no additional credit or interest rate risk because the HKMC is funding the entire second mortgage at the time of origin.
From the borrowers' viewpoint, second mortgages may have been useful when there was no alternative. But in today's highly developed financial market, there are cheaper, more efficient and consumer friendly alternatives (one-stop shopping mortgage plans) offered by non-bank financial institutions which reduce transaction and financing costs and streamline the process for the borrower (see table).
Borrowers also have the option to select mortgage insurance from various providers, which is again more simple and efficient for the borrower than two mortgages.