The Hong Kong Monetary Authority has stopped banks allowing people to delay principal repayments on their mortgages as the growing US subprime crisis raises fears that lenders are taking on too much risk. The de facto central bank asked local lenders yesterday to stop providing so-called deferred principal repayment mortgage schemes immediately. The schemes allow borrowers to repay interest-only on a loan for a period of time, after which the monthly repayments are restored to normal. 'The HKMA is concerned that this practice may expose lenders to considerably higher risks in the event of loan default,' Choi Yiu-kwan, deputy chief executive of the HKMA, said in a letter to lenders. Banks are increasingly providing principal repayment 'holidays' of up to three years as they battle for market share in a tough mortgage market. But while Hong Kong property prices have soared in recent years, the threat of a global recession has raised the spectre that a slump in the market could leave many exposed to major debt. Banks are not allowed to lend more than 70 per cent of a property's value. But through packages provided by developers or mortgage insurance schemes, people can borrow as much as 95 per cent of the value of a flat or house. One local banker said: 'Sweeteners like deferred principal repayment could prompt more speculation in the property market and banks could be hard hit if the market situation worsens.' Joseph Yam Chi-kwong, chief executive of the HKMA, said yesterday that financial institutions had to assess and manage risks in light of the experience in the US. Louis Chan Wing-kit, executive director of Centaline Property Agency, said deferred principal repayment schemes attracted buyers who were not able to save enough for a down payment. 'Buyers who have opted for these payment schemes may stretch their repayment ability once the monthly repayment returns to a normal level a few years later,' Mr Chan said. 'In a market downturn, they may walk away from the purchase.' Developers also provided similar schemes to drum up interest for their new projects, Mr Chan said. However, the HKMA had no power to regulate these schemes. This month, Cheung Kong (Holdings), through its financial arm AMTD Financial Planning, provided a preferential scheme for buyers of its Capitol project in Tseung Kwan O. The scheme allowed buyers to defer paying the principal for up to 36 months. Buyers were required to pay a 5 per cent down payment and AMTD provided the remaining 95 per cent. Anno Sin Kwok-cheung, senior sales manager at Hong Kong Property in Tseung Kwan O, said that after the completion of the loan application process, AMTD rebated 5 per cent of the flat value to buyers. 'It is effectively providing a 100 per cent mortgage to buyers,' he said. Stanley Wong Yuen-fai, an executive director at ICBC (Asia), said about 10 lenders provided deferred payment schemes, usually for new property sites. But he said the amount involved was small compared with total mortgage lending. 'The regulator may be worried that more and more banks will provide such schemes amid fierce competition,' Mr Wong said. 'The default risk could be relatively higher in three to four years if the market environment changes.'