Financing your dream home
Since low interest rates are having a negative impact on mortgage terms, Alex Frew McMillan advises prospective borrowers to shop around for the best offer
Prospective property owners are being lured into the market by Hong Kong’s very attractive interest rates. But when they try to get a deal at the bank, they may be a little disappointed.
Faced with mortgage rates that are now below the rate of inflation, many banks have reined in their mortgage terms. This means that the mortgage offer you’ll get will likely be considerably less attractive than it would have been just a year ago, before banks started their series of interest rate cuts.
Derek Ma, a private investor who specialises in Hong Kong property, says he has noticed the banks getting tighter in the mortgage terms they are prepared to give. “Because the interest rate has gone down, there are less attractive terms. The banks are making less money.”
Where borrowers might have been offered a deal at the prime rate – or P – minus 3.2 percent or 3.25 percent around 12 months back, terms can be as low as P minus 2.0 percent now.
Even relatively attractive rates are only for people borrowing against the “best” apartments, new ones that the bank knows would resell easily and hold their value if the borrower goes under. Borrowers who are deemed less credit worthy or who are trying to buy older properties may discover they get much worse deals.
“A friend of mine just got P minus 2.7 percent,” Ma says. “But it’s a first property, she had a stable income and works in an investment bank, so she’s got all the right credentials.”
It is important to clarify that it is the terms that are not attractive, rather than the actual rate of interest itself. Although your “P minus” number might not be all that good, the rate you pay will be low, because the prime interest rate is so low in the first place.
“It beats leaving money in the bank to earn almost zero interest,” says Suzanne Liu Duddek, an accountant who runs the firm of S. Liu & Co. “Inflation is at 5.3 percent, so we still have negative real interest rates.” In other words, the rate of interest you’ll pay on a mortgage is less than the rate of inflation.
The best bet at the moment for mortgage terms, real-estate professionals say, is Standard Chartered, which is still offering deals as attractive as P minus 3.15 percent. With their prime at 5.5 percent, this equates to an actual interest rate of just 2.35 percent, less than half the rate of inflation.
Hang Seng is also offering relatively attractive terms, at P minus 2.75 percent for mortgages of more than HK$1.5 million, or P minus 2.5 percent below that level.
But smaller banks have sharply corrected the terms they’re willing to offer. Citic Ka Wah has been quoting terms of P minus 2.0 percent on new mortgages after a review of its rates. This compares to terms of P minus 2.8 percent before the recent credit crunch.
Of course, no one expects banks to lose money on the mortgages they offer. There’s always a gap between the rate you pay them and the rate they pay depositors, which gives them their profit margin. But the very low interest rates that Hong Kong is now experiencing has resulted in some strange situations.
At the beginning of May, the Hong Kong Monetary Authority cut its base interest rate to 3.5 percent, following the lead of the US Federal Reserve, which it basically has to follow since the Hong Kong dollar and US dollar are pegged.
But although US banks followed that cut, HSBC said it was leaving its prime rate unchanged at 5.25 percent. And there’s plenty of gap between that rate and what it pays the people who put money there – savings rates also remain the same at 0.01 percent for deposits of more than HK$5,000.
HSBC and other big banks normally offer the best prime rates, while smaller banks offer a prime of 0.25 percent higher, now 5.5 percent. But all have cut their rates eight times since September 2007, when they stood at 7.75 percent to 8.0 percent.
With savings rates virtually at zero – and people who are leaving their money in the bank effectively losing money by keeping it there thanks to inflation – there isn’t much room for further rate cuts, experts say. Banks would have to trim their margins instead.
They don’t want to. And the banks are also covering themselves by offering worse deals. The difference between P minus 2.5 percent and P minus 3 percent is a small one on paper but can make a big difference in monthly mortgage payments.
It also makes a big difference over a long period of time. Many mortgages are set for 20 or even 30 years, and interest rates won’t stay low forever.
But agents say most property buyers don’t think that way. And they can always refinance their mortgage at more attractive terms if rates go back up.
“I think people are happier nowadays because the interest rate is much lower,” says Judy Chai, the executive director of Sallmanns Residential. “Not many people have a mindset of thinking 20 years along the road. They are thinking about what they are paying this year or next, so they’re happy they’re paying so little into their mortgage.”
But these terms won’t look very attractive if interest rates do bounce back.
“I think the interest rates will remain relatively low in the next 6 to 12 months,” Liu says. “However, one should budget that it will go up as the US economy recovers slowly. The interest rate is so low now that the only way is up.”
Liu is allowing for interest rates to rise 2 percentage points over the next year, giving her some wiggle room in her budget.
Of course, if you want to buy a property now, you have to take the best terms you can get.
Banks typically do not turn down mortgage business outright. But they will often roll out difficult or unattractive terms to borrowers or properties they don’t like the look of on paper.
Although a single bank can lend a maximum of 70 percent of a property’s value in Hong Kong, banks may reduce that ratio to 50 percent or less for deals they deem “difficult”. Having to make up half the purchase price in a downpayment then wards off problem borrowers.
The valuation is another point of contention. Although your agent is duty bound to find you a deal that reflects the market rate, the bank may not. That’s particularly true when the property market is going up quickly – the appraisal companies that the bank uses will be a little behind the market.
The bank is likely to meet your purchase price if it likes the property and your price isn’t too far above their quote. But if the property is old, has odd or illegal structural alterations or you are paying well above the market rate, the bank may leave a significant gap between its valuation and your price.
Bank terms on mortgages are normally fairly standard. But it is very important to shop around now, since they are starting to diverge quite a bit depending on the institution.
Ma, who is buying a new property near Bonham Road in the Mid-Levels, suggests that property buyers may want to consider using a mortgage broker instead of going directly to the bank. He is working with a company called mReferral, a joint venture between Cheung Kong Holdings, Midland Realty and American Express.
“They go around looking for the best mortgage deal,” Ma explains. But with the banks looking leaner of late, he admits he’s very interested to find out what they come back with.
“We haven’t got the offer yet. It should be coming through in the next few days, so we’ll see what they say.”