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Advice for borrowers
Talk of a ‘mortgage war’ may be overdone, but banks are rolling out new and more varied products, and getting a bit more flexible on the amount they’ll lend. Alex Frew McMillan reports
He that hath lost his credit is dead to the world,” the poet George Herbert once wrote. And for a few months late last year, all of Hong Kong was dead – if not to the world, then at least to the banks.
Financial institutions became very tight on lending in the last three months of the year, getting extremely cautious after Lehman Brothers went bankrupt in September. At the same time, the property market turned down sharply, with property prices slumping 17.1 percent in the last quarter, according to the Hong Kong University All Residential Price Index.
It’s a vicious spiral. With prices falling, banks didn’t want to lend, meaning people couldn’t buy, meaning prices fell further. Although banks didn’t say outright that they wouldn’t grant borrowers a mortgage, they became very conservative on valuations. Many also wouldn’t lend the maximum 70 percent of the value unless they felt very sure both about the borrower and the property.
“A lot of the banks aren’t lending at 70 percent of bank valuations anymore,” Victoria Allan, the managing director of the brokerage Habitat Property, says. “That’s the main thing that makes financing tricky. It limits your buyers. You also can’t get a [good] bank valuation, so unless you’re really cashed up to go and buy, you can’t. It’s still really difficult.”
The dramatic change is reflected in the data on the total amount of new home loans. From a high point of HK$23.6 billion in January 2008, the number of new mortgages drawn down in Hong Kong has shown a steady decline, to just HK$6.1 billion in January 2009, according to data from the Hong Kong Monetary Authority and mReferral Mortgage Brokerage Services. That’s a drop of 74 percent.
Sharmaine Lau, the chief economic analyst at mReferral, a mortgage brokerage, says the mortgage business slumped partly because people stopped buying new apartments or off-plan. “The first-hand property market is more sensitive to the economic situation,” she notes. Banks “were being very sceptical about the property market”.
But 2009 is a new year, and banks are more keen to win new mortgage business. “By the beginning of 2009, they were releasing more funds,” Lau says. “Banks usually release more funds in mortgages at the start of the year, so there is a seasonal factor, and the economic downturn has not really been worsening.”
HSBC has been particularly leery about granting new mortgages during the downturn, agents say, and its reticence has been reflected in a fall in its mortgage market share. That peaked at 30.6 percent of the city’s mortgage business but has since slumped to 16.4 percent, mReferral figures show.
The bank declined to discuss its lending strategy for this story. But smaller banks have been making good inroads into its business, with the Bank of East Asia (BEA) now the third most active lender, with 13.0 percent market share as of February, the most recent figures available. That put it just behind Hang Seng, in second place with 14.7 percent of the market. BEA says it is shooting for double-digit growth in loans, particularly mortgages.
Standard Chartered has also been more aggressive on its valuations and lending ratio, and has seen its slice of the pie grow to 11.9 percent. The Bank of China and DBS Bank are the next most active lenders, with 7.8 percent and 4.1 percent market share, respectively.
Interest rates are currently very low, with the prime lending rate at HSBC, Hang Seng and Bank of China – called ‘small P’ – at 5 percent, while most other banks are using a ‘big P’ prime rate of 5.25 percent.
Typical Hong Kong mortgages float, moving as the prime rate goes up and down, and are offered as a discount off the prime rate. For instance, Wing Hang Bank is currently offering P-2.4 percent for the first three years of a mortgage, and P-2.25 percent after that.
That equates to an overall mortgage interest rate of 2.85 percent now, and 3 percent after three years, although of course rates will likely have changed by then. The Bank of Communication has the best headline rate by those terms, offering P-2.6 percent in the first year and P-2.25 percent after that.
“The mortgage rates are really good at the moment,” Allan says. “Generally the whole lending environment is just cautious. But it is a lot better than somewhere like London – in London you can hardly borrow.”
The kinds of mortgages that the banks are offering are also getting more varied. Mortgages based on the Hong Kong Interbank Offer Rate (HIBOR), or the interest rate banks use when lending to each other – are increasingly popular.
According to mReferral, which shops around for the best mortgage for home buyers, receiving a commission from the banks, HIBOR-based mortgages now equate to 28.4 percent of the mortgage market in Hong Kong. Prime-based mortgages make up the other 71.6 percent. But HIBOR-based plans have rocketed in popularity – as recently as last September, they were just 3.8 percent of the market.
The disadvantage of a HIBOR-based loan is that HIBOR – typically steady – can suddenly shoot through the roof if there are liquidity problems and banks stop lending to each other. The new generation of HIBOR-based plans addresses that problem by offering a cap on the rate using prime.
For instance, China Construction Bank is currently offering a mortgage at HIBOR plus 1 percent for the length of the loan, but if HIBOR races upwards, the interest is capped at P-2 percent. If it was based on the six-month HIBOR rate, which was at 1.21 percent in late March, that made for a mortgage rate of 2.21 percent, with a cap at 3.25 percent.
Fixed-rate mortgages have also started to crop up. HSBC led the way on March 10 when it introduced a fixed-rate plan, something that had previously been impossible to find in Hong Kong. If you qualify for the best rate – and that can be a big if – the HSBC plan fixes interest rates at 2.18 percent if you fix it for one year, 2.48 percent if you fix it for two, and 2.68 percent for three years, followed by a prime-based plan at P-1.75 percent. The mortgage is only open to Premier and PowerVantage HSBC customers.
“We are introducing this fixed-rate mortgage plan to help homeowners capture the benefits of the current low-interest environment and to minimise the potential impact of interest rate fluctuations,” Diana Cesar, the bank’s head of distribution strategy and management, writes in an email. “This plan is particularly suitable to those who wish to work out a well-defined budget for the first few years of their mortgage payments.”
Other banks have quickly followed suit. The BEA, Standard Chartered, DBS, Wing Lung Bank and Fubon Bank are all also now offering fixed-rate plans.
Sceptics say that fixed rates are only of real benefit if they are long term, and that borrowers may be better off with a fluctuating rate mortgage. But the flexibility will certainly be welcomed by customers, and the plethora of new plans shows how banks are starting to compete for mortgage business again.
“HIBOR, fixed rate, P-based, the banks are offering new plans every day,” Lau says.
Borrowers who aren’t able to put much down on a property will likely still find life hard. It is currently almost impossible to get a loan of 95 percent of a property’s value, mortgage bankers say. Such deals were available last year before September, but lenders clammed up after Lehman Brothers went bust. However, borrowers may be able to secure 90 percent financing, particularly if they have a strong, steady source of income.
It’s virtually impossible for Hong Kong’s property market to function without reasonable access to credit. When the money taps turn back on, the liquidity pushes sales and, in the long run, may help prices. This seems to be starting to happen. The number of sales and purchase agreements signed in Hong Kong hit a record low of 3,884 in November. But the number of residential sales transactions has been rising, with an estimated 6,500 in March, according to DTZ – still well below the average for the last few years – and prices have steadied.
“The banks are more aggressive on mortgage lending,” Buggle Lau, the chief analyst at Midland Realty, says. “Prices have stabilised and transactions are picking up.”
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