|
The bottom rung
Are you looking to get on the property ladder but unsure if the time is right? Alex Frew McMillan provides some essential tips for first- time buyers
This is a punishing time for property owners, with prices heading south in a hurry, and only expected to fall for the rest of the year. But the downturn is prompting some people to start wondering if this is the dip they have been waiting for in Hong Kong’s notoriously volatile market. They may not be willing to buy now, but they want to be ready when the market turns.
“My general philosophy is not to follow the pack,” says John Fleet, a British-born computer programmer. “I just want to get in, even if it’s not at the bottom. I would rather get in at a point when I have got good value rather than waiting to get the maximum deal and then miss out.”
Pundits suggest Hong Kong’s property market could rebound quickly once confidence returns. So it may be better to do your homework now rather than trying to buy into a rapidly rising market.
“There is a lot of money sitting on the sidelines,” says Chris Dillon. “People are waiting for that first glimmer of dawn, and then a lot of people are going to pile into the market.” Dillon is the author of Landed: The expatriate’s guide to buying and renovating property in Hong Kong.
“Figure out where you want to live and how much you want to spend – do all of that now,” Dillon suggests. “In the typical Hong Kong manner, people are going to go from being very pessimistic and despairing to optimistic in a couple of days.”
According to the Hong Kong University Real Estate Index Series, property prices had slowed their descent in December but were still down 10.8 percent in a year, and 20.5 percent in the last six months.
Fleet, who moved to Hong Kong 15 years ago and has been renting apartments ever since, believes the declines are starting to make this an attractive time to move into the market. But while many expats enter the Hong Kong property market early, he has no experience, and isn’t sure how to take the first step.
“When you go from scratch like I am, it seems like a minefield you have to wade through,” Fleet says. “There is a real need for basic information. I want to cut out any likelihood of problems, and I want to make it as safe and secure as possible.”
The property market can seem intimidating to enter, largely because a home purchase is the biggest buy most people make in their lifetime. So it’s understandable that first-time buyers can be put off by a lack of knowledge.
One of the most mystifying procedures in buying a property for the uninitiated is applying for a mortgage. But lining up the financing and working out how much you can afford is one of the first steps buyers should take.
So a visit to the bank makes a good first step, and it’s advisable to do this even before looking for a property agent. A mortgage banker can walk first-time buyers through the buying process and can also advise on whether it is possible for them to embark on a purchase. After all, if you don’t know how much you can afford, going for an apartment that is HK$3 million or HK$4 million would be meaningless.
It is a good rule of thumb that your mortgage payments, together with all other debt repayments such as tax loans and personal loans, should amount to no more than 50 percent of your monthly income. In the current financial environment, banks are also being very conservative. They may require you to settle any other loans before they are willing to grant you a mortgage.
So how much house can you afford? For a loan based on the Hong Kong Interbank Offer Rate (HIBOR), a typical mortgage rate would currently be around 2.5 percent. Based on those rates, for a monthly mortgage payment of HK$10,000, you could borrow HK$2.5 million.
If a buyer puts down 30 percent and takes out a 30-year mortgage, that would mean he or she could afford an apartment that costs just over HK$3.5 million.
A mortgage banker can walk you through the figures. Interest rates are, of course, currently very low, which makes mortgages attractive. But you have to allow for the fact that these rates may escalate later in the life of the mortgage.
Though many buyers only contact the bank once they have agreed to buy a property, it is possible to get a pre-approval on a mortgage. The process works exactly like applying for a mortgage itself, with the sole exception that the buyer has not yet signed a Sales & Purchase Agreement (S&P), which commits them to a deal. With a pre-approval, if the mortgage doesn’t come through, you are still free to walk away. Once you’ve signed the S&P, you would lose your deposit.
A pre-approval should take about one week to process. The application will likely be quicker if your income is consistent and you have a set salary – longer if you work on commission, have an irregular income or are self-employed.
When property markets are rising fast, one week can be too long to wait. But a pre-approved mortgage is a safer course to take for first-time buyers who may be unsure of their borrowing ability. It also removes the fear of losing a deposit on a property if you sign a deal to buy and only then discover you are unable to finance it.
In Hong Kong, banks will only lend a maximum of 70 percent of a property’s purchase price. That means it is normally necessary to put down 30 percent of the price you agree with the seller as a downpayment. This is often the biggest obstacle for first-time buyers.
For an apartment that costs HK$1 million, you need to pay HK$300,000 in cash, and that’s ahead of other costs involved in the deal, such as agent’s fees, legal fees and stamp duty, as well as any renovations, which also have to be paid in cash.
It is possible to secure a mortgage with a lower down payment. But the borrower has to work through the Hong Kong Mortgage Corp (HKMC). With its Mortgage Insurance Programme, the bank provides 70 percent of the purchase price, and the HKMC tops up the mortgage with another 20 percent or 25 percent of the price, for a total mortgage of 90 percent or 95 percent of the property’s cost.
The HKMC (www.hkmc.com.hk) says it backed 12 percent of the loans granted in 2007. Although the programme was initially designed for buyers who plan to live in the property, the corporation started offering loans of up to 85 percent of the value of investment properties at the end of 2007.
With an idea of how much you can afford, you are ready to start your property search. The bank will help you value any property you are considering, telling you whether the price the seller is asking is reasonable and in line with what the bank is willing to lend.
Once a buyer and seller settle on a price, they sign a preliminary S&P then and there, outlining the terms of the purchase and the dates involved. The buyer puts down 5 percent of the purchase price as a deposit. Another 5 percent of the purchase price is due in two weeks, when the buyer and seller sign the formal S&P, normally at the offices of their respective lawyers.
Completion of the sale – when the remaining 90 percent of the price is due – normally takes place two or two-and-a-half months later. These dates can be negotiated to some degree if you need extra flexibility. You then have that time to approach banks for the mortgage.
Although the procedure of paying 5 percent, 5 percent and then 90 percent of the price is standard, mortgage bankers say this is up to negotiation between the buyer and seller.
The current bear market may not be the ideal time to ink a deal. But it’s a good time to start the process of figuring out what you can afford. “I can’t with hand on heart say this is a good time to buy because there is no visibility here, we can’t say whether we have hit bottom,” Dillon says. “But it is a good time to do your research.”
Click here for local property listings
|
