Developers offer buyers financing to get around banks’ loan-to-value curbs
Developers are bypassing regulations on how much banks can lend by offering extra loans, which experts warn puts the buyers at risk
Hong Kong's biggest developers are skirting around bank restrictions by offering loans to raise the mortgage ceiling up to 85 per cent of a flat's value - which could put buyers at risk of a default if home prices fall significantly.
To speed up sales of large units, developers are providing an array of financial schemes as banks reduce the maximum loan-to-value (LTV) ratio for high-priced homes.
"A higher loan-to-valuation ratio will definitely mean higher risk," said Ivy Wong Mei-fung, Centaline Mortgage Broker's managing director.
Developers have gradually been increasing the size of second mortgages through finance companies to 40 per cent this year from 20 per cent, as competition for buyers intensifies.
Sun Hung Kai Properties, Hong Kong's second-largest developer by market capitalisation, offered a one-year bridge loan equivalent to as much as 70 per cent of a flat's value to promote Mount One in Fanling on Tuesday last week. All 44 units in the first batch were sold yesterday.
SHKP also provides a second mortgage of up to 25 per cent to buyers of flats at Mount One selling for more than HK$7 million. The first and second mortgage loans combined cannot exceed 85 per cent of the purchase price.
Cheung Kong, the city's largest developer in terms of market capitalisation, offered a second mortgage loan of up to 40 per cent last month, compared with 20 per cent in January, to boost the sales of Diva in Tin Hau.
Flats at both projects are selling in the range of HK$10 million to HK$22 million, which would subject them to a maximum LTV ratio of 50 per cent under the Hong Kong Monetary Authority's instructions to banks.
One agent said the higher second loans mainly target investors and non-local residents who have secured mortgage loans of as low as 30 per cent.
"With a 40 per cent second mortgage, these buyers can borrow 70 per cent of the flat's value. I have seen an increasing number of buyers opting for extra loans, as banks have become cautious in granting mortgage loans to investors and mainland buyers," the agent said.
The aggressive extra lending to boost sales was prompted by the HKMA's tightening of mortgage loans for high-end flats in September in 2012 to minimise the lending risk of banks.
The regulator instructed banks to lower the maximum LTV ratio for properties priced between HK$10 million and HK$12 million to 50 per cent from 60 per cent.
For mortgage applicants whose principal income is derived from outside Hong Kong, the maximum LTV ratio was lowered by 20 percentage points.
Following the credit tightening, the number of transactions for homes worth more than HK$12 million dropped 39.7 per cent to 786 in this year's first quarter from 1,304 a year earlier. The total value of deals declined 56 per cent year on year to HK$22 billion.
The HKMA said it noted recent market developments in respect of residential mortgage financing.
"Homebuyers who look for mortgage financing should pay attention to various risk factors, including interest rate risk and refinancing risk. In particular, their long-term affordability in taking out a mortgage loan with a high level of LTV should be carefully considered," it said.
Victor Lui Ting, deputy managing director of SHKP, said the one-year bridge loan and second mortgage were aimed at helping upgraders, who are the most affected by the doubling of stamp duty and the credit tightening.
"Our units at Mount One are three- to four-bedroom flats costing about HK$11 million each. We have to help these buyers, as some of them will be able to get a bank loan of only 50 per cent," Lui said.
Without the extra loan, a buyer must make a down payment of about HK$5.5 million. Meanwhile, the government will only waive the double stamp duty if a family sells its existing flat within six months after buying a new flat.
"Our buyers only borrow up to 70 per cent with the first and second mortgages. In fact, we do not see lots of demand for second mortgage loans, and we are only offering more alternatives and choices for our customers," Lui said.