Village houses in Hong Kong are more complex to buy than a flat in multi-storey building or complex

Sharmaine Lau is chief marketing officer of mReferral Mortgage Brokerage Services. She discusses the complexities of getting a bank loan to buy a village house.

Is it more difficult to apply for a mortgage on a village house, considering the strict vetting process banks apply?

By loose definition, village houses can be classified as the most typical ding uk, or those regulated by the Small House Policy enacted in 1972, located within the New Grant Lot, and those rebuilt from older village houses on land granted by the former Village Block Crown Lease, now known as Block Government Lease, in 1905. A typical ding uk, governed by the Small House Policy, is confined to three storeys and has a maximum saleable floor area of 700 sq ft. The owner of a ding uk, [such as] an indigenous villager, would have to pay a land premium to the government for the house to be marketed privately. Having said that, the title to a village house, and the ownership of the lot it is built on, is often more complex than a typical flat in a multi-storey building or residential complex. So, it usually takes longer for a bank (or the valuer) to carry out due diligence on the title, permitted uses, legality of construction, encumbrances and easements before approving a loan and determining how much the bank is willing to lend.

Is it typical for buyers to get lower valuations from commercial banks for a village house they want

to purchase?

Transaction volumes of village houses are thinner than flats in housing estates. In the absence of an active market, where a large number of “comparable transactions” can be referred to, lenders tend to set the value on a village house they plan to lend against lower than how much the buyer is willing to pay for it. Owing to the complexity of ownership and land lease issues, the bank would have to send a valuer to survey the property’s integrity, utilities, size, construction and turnover of properties that the valuer considers as “comparable” to the subject property. Together with the physical conditions, the surveyor will include their estimated valuation for the lender to determine how much to be lent.

Apart from lower valuations, would a village house buyer get a lower loan-to-value (LTV) ratio? What about the rates and terms?

Let’s assume it is a first-time buyer and a Hong Kong permanent resident, he or she would be exempted from most mortgage restrictions on second-home buyers, investors and foreigners. Given that the applicant qualifies financially and has passed a stress test, some banks are willing to offer an LTV ratio of up to 85 per cent of their valuation. First-time buyers may obtain further financing through Mortgage Insurance Programme (MIP). That down-valuation is not uncommon. If you are planning to buy into a village house, set aside extra cash for a higher down payment. In the past, it was common for banks to only approve mortgage loans tied to the prime rate. Nowadays, more banks offer Hibor-based loans to finance purchases of village houses, including cash rebates, but availability and rates depend on the borrower’s financial health and creditworthiness. Some banks offer deals of up to 30 years, but the actual lending term varies, subject to the age of the house.

Is it safe to buy an off-plan village house?

To sell a ding uk, the owner or developer has to first pay a land premium. Prior to that, a Certificate of Compliance must have been issued by the Lands Department after the property is completed. Buying a ding uk off-plan is not part of the conveyancing process. In other words, the off-plan buyer, even after he or she has paid a deposit to the seller, does not get legal protection until the developer has fully paid a land premium and has gained consent from the Lands Department. Buying a village house off-plan is at your own risk. Banks would not approve mortgages on them at this point.