Explainer | What does Hong Kong’s move to cut out lawyers in mortgage transactions mean for property buyers
- The Hong Kong Monetary Authority has cut out lawyers’ role in mortgage transfers in a pilot plan to protect buyers from insolvent legal firms
- But property buyers still need law firms to assist them with other aspects of a transaction
The Hong Kong Monetary Authority has kicked off a pilot plan to cut out the role of law firms as middlemen in the transfer of residential mortgage payments to speed up the payment process and to protect property buyers.
Homeowners who want to refinance their mortgage loans can ask their banks to transfer approved mortgage loans directly, bypassing law firms.
The HKMA said it could expand the Payment Arrangements for Property Transactions plan to other types of secondary market property transactions or even first-hand sales after the end of the trial period in six months’ time.
While the scheme can help reduce the risk of funds getting frozen when the law firm handling the fund goes bust, it will hardly save homebuyers time and cost, according to lawyers and property agents.
What are the major differences between the new payment scheme and the current practice?
According to the HKMA’s new plan, the bank refinancing the mortgage will transfer the proceeds directly to the original bank via the interbank payment system.
The new scheme avoids problems with the operation of law firms or frozen funds in the past, which immediately affect the transaction or mortgage loan delivery, said Ivy Wong, managing director of Centaline Mortgage Broker.
A law firm is still required to handle the execution of the mortgage and redemption document. This, however, saves clients the trouble of arranging the fund transfer.
“It may save time for borrowers as they do not need to come to the law firm to pick up cheques for the loan as the sum is now directly credited to a client’s bank account,” said Polly Chu, a partner at law firm Withers.
In the existing practice, loan proceeds are transferred by the bank refinancing the mortgage to law firms on the drawdown date and then the law firm, on the same day, issues cheques to the existing mortgagee bank and borrowers.
Most law firms would also arrange to deposit the cheques payable to the borrower directly on the same date.
“I don’t think much time is saved under the new payment proposal,” said Chu. “We understand that all involved banks need time to check and verify the transfer of loan proceeds, and the loan proceeds will only be credited and cleared to the borrower’s bank account on the next business day after drawdown.”
As for the legal fee, it depends on the law firm processing the transaction.
However, “not much money is saved because the borrower is still required to [have] a law firm prepare the mortgage deed and redemption documentation,” added Chu.
How will the changes affect the process of buying second-hand homes if the scheme is extended to this segment?
Even if the new arrangement for transaction payment is extended to new and second-hand properties, the process of buying a home is the same as before, said Dave Ma, Hong Kong Property Services (Agency)’s chief operations officer and director of Kowloon.
The buyer still has to deal with the formal sale and purchase agreement and the title check through a law firm.
The extension of a law firm does not mean additional expenses, but it can provide an extra layer of protection for both buyers and sellers in the mortgage process, said Ma.
The new payment proposal will minimise the risk when there is an intervention into the practice of a law firm by the Law Society and the firm’s funds are frozen. The Law Society exercises its statutory power to close down the practice of the law firm for the protection of the interests of the clients of the law firm and the public.
If the refinancing case involves a simple transaction, it may minimise risk, said Chu at Withers. However, if the refinancing case involves other parties or other payments, for example, part of loan proceeds are to be used as partial payment for buying a new house, the parties may still be required to deposit the sum in the law firm’s account for custody, she added.
The new payment option can help Hong Kong keep up with other jurisdictions, such as Canada and mainland China, said Doreen Kong, a legislator and real estate lawyer.
It can also boost the convenience of banking transaction and update Hong Kong’s payment method, Kong added.
