Caution sounded as developers’ financing schemes seen as enabling highly-leveraged home buyers
New flat buyers in Hong Kong are taking advantage of developers’ generous financing plans with larger mortgage sizes, although experts cautioned that the leveraging could amount to heightened risk of defaults should the residential market reverse its rising trend.
The highly geared home owners, many of whom are young buyers, are bound to be the first to feel the pinch in the event of a major drop in property prices, analysts say.
Ivy Wong Mei-fung, managing director of Centaline Mortgage Broker, a unit of the Centaline Property Agency, said the schemes on offer from developers provide financing for an average of 80 per cent of the flat’s value at low interest rates for the first two or three years.
The average loan size was HK$3.5 million, she said.
Centaline found that nearly 18 per cent, or HK$2.6 billion, of the estimated HK$14.7 billion in approved mortgage loans for new flats due to be delivered next year came from developers’ finance units rather than banks. That compared with 16.4 per cent for new developments scheduled for completion this year, and 11.6 per cent for projects delivered last year.
“But this group of borrowers will see their mortgage interest rate rise to 5 per cent after the preferential terms come to an end,” she said.
In general, developers charge 2.25 per cent below prime for the first three years, and will match the prime rate from the fourth year. The prime lending rate now stands at 5 per cent.
For instance, under these terms a buyer purchasing an apartment for HK$6.25 million would be required to put down HK$1.25 million as a down payment, equivalent to 20 per cent of the flat’s value.
The remaining 80 per cent, or HK$5 million, would be financed by the developers’ finance arm or other money lenders, which operate outside the regulatory oversight of the Hong Kong Monetary Authority (HKMA).
Initial monthly repayments of HK$23,066 will increase 24 per cent from the fourth year to HK$28,544, assuming a 25-year HK$5 million loan at an initial 2.75 per cent rising to 5 per cent.
Cheung Kong Property Holdings reaped more than HK$6 billion from the sale of all 498 units at Ocean Pride in Tsuen Wan on Friday after it offered mortgage financing of up to 85 per cent of a flat’s value. It will release another 346 units on the market on Wednesday.
Developers have continued to provide aggressive mortgage financing, even as the HKMA tightened mortgage lending rules on May 19, implementing measures aimed at stopping the city’s runaway real estate prices which has surpassed its previous peak in 2015.
Under the new HKMA rules, those with an outstanding mortgages face second caps such that properties valued at less than HK$10 million are limited to financing 50 per cent of the total price, and 40 per cent for those exceeding HK$10 million.
Following the HKMA’s tightened lending requirements, four of Hong Kong’s biggest banks raised their mortgage rates by 10 basis points to 1.4 percentage points above the city’s interbank offered rate, or Hibor during the weekend.
Alfred Lau, a property analyst at Bocom International said some home buyers would probably default on their agreements and forfeited deposits if home prices dropped steeply over the next three years.
“Developers charge higher interest rates after the holiday period as they encourage these borrowers to shift their loans to banks where interest rates could be lower,” he said.
But buyers would be required to fork out an extra 20 per cent to 30 per cent of a flat’s value to meet the new bank mortgage loan cap of 50 per cent, he said.
Sharmaine Lau, chief marketing officer of mReferral Mortgage Brokerage Services, said the mortgage schemes offered by developers enabled many buyers to benefit from the property boom.
“It provides a convenient way for buyers who cannot afford a 50 per cent down payment for a HK$10 million apartment. If prices rise over next the three years, property owners could sell the apartments and trade up for a bigger one,” she said.