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Hong Kong Monetary Authority (HKMA)

Finance firms upend HKMA’s lending caps on property, adding fuel to red hot market

Convoy Global and ETC Finance are teaming up with several property agents to lend up to 90 per cent the value of apartments, shops and industrial units

PUBLISHED : Wednesday, 28 September, 2016, 10:43pm
UPDATED : Friday, 26 January, 2018, 4:14pm

Two finance firms are challenging the Hong Kong Monetary Authority’s mortgage lending caps , offering more financing than current bank loans to attract new borrowers ahead of a possible interest rate increase in December.

Convoy Global Holdings, the largest of Hong Kong’s listed finance firms, and ETC Finance teamed up with Centaline Property Agency, Midland Realty and Ricacorp Properties to lend up to 90 per cent of the value of apartments above HK$8 million, agents said.

For units worth more than HK$12 million (US$1.5 million), the loans-to-value ratio, or LTV ratio, could be up to 80 per cent for 30 years.

The finance firms charge an interest rate of between 2 and 2.5 percentage points below the prime lending rate, which stands at between 5 per cent and 5.25 per cent in Hong Kong.

Hong Kong’s bank loans are capped at 60 per cent of the value of homes between HK$6 million and HK$10 million, and 50 per cent for homes worth more than HK$10 million, according to February 2015 rules by the Hong Kong Monetary Authority.

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“Such plans encourage more buyers, including those fail the stringent credit requirements at banks, to enter the market,” said Alvin Cheung Chi-wan, associate director at Prudential Brokerage in Hong Kong. “It adds fuel to a property market that’s already red hot.”

The finance companies are beyond the reach of the Hong Kong Monetary Authority, as they are regulated by the Money Lender Ordinance, which is enforced by the Commissioner of Police.

Under the plan, a buyer of a HK$8 million home only needs to put down an initial deposit of HK$800,000, and be financed for the remainder of the purchase. A buyer who gets a standard bank mortgage will need a down payment of HK$2.4 million for the same apartment.

Finance firms are exploiting the loophole, aggressively pushing their loans before interest rates follow the US Fed’s increase in December. That’s creating a “time bomb” in the property market, Cheung said.

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Loans by these finance firms aren’t limited to apartments. Their mortgage programmes lend up to 80 per cent of the value of shops and industrial units, even those valued at HK$100 million, at rates of as low as 1 percentage point below prime, without the need to submit a proof of income.

According to the Hong Kong Monetary Authority’s March 2015 guidelines, banks are advised to sever their credit relations with finance companies if the latter don’t adhere to the regulator’s mortgage guidelines, the HKMA said in a written reply to the South China Morning Post.

The HKMA also required banks to reduce the applicable debt servicing ratio (DSR) limit by 5 percentage points if the total amount of financing obtained by a borrower, through a combination of mortgage loan and any co-financing or mortgage insurance scheme, exceeded the normal permissible LTV cap by 20 percentage points.

Following the guidance, some finance companies have ceased engaging in property mortgage lending or exited their credit relationship with banks, said HKMA.

The flexible financing scheme follows a strategy by developers to switch to selling luxury apartments priced at above HK$8 million, from selling mass market flats.

Sun Hung Kai Properties yesterday raised the price of its Shouson Peak luxury villa in Deep Water Bay by 14 per cent, or HK$40 million each. The price of a 3,561 square feet villa with a 1,114 sq ft garden, was raised to HK$315 million, or HK$88,458 per sq ft.

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Flushed with easy money, about 3,300 new flats, mostly in the price category of HK$4 million to HK$6 million, were sold in September alone, according data by Midland Realty.

“It’s the highest in terms of sales in the past 10 years,” said Sammy Po, chief executive at Midland Realty’s residential department.

Sharmaine Lau, chief economic analyst at mReferral Mortgage Brokerage Services, a unit of Midland Realty, said finance firms would approve loans in accordance with the ability of applicants to repay.

She notes total value and application of mortgage loan plunged more than 40 per cent in the first seven months of this year since the lending curb.

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“The finance scheme is aim to assist home buyers to put down initial down payment amid banks’ tough rules,” she said.

Yesterday, the government offered five residential sites and two plots from MTR Corporation for tender in the three months to December. The seven sites will add 4,600 flats to the current property supply.