My high school friend Ben is tough to pin down. Along with being the busy father of three, he travels two weeks each month for his job. When we got together for one of our rare lunches, I had recently seen a flat that I was coveting. Conveniently, Ben works for Bank of China and didn’t mind having his professional brains picked over pomelo salad.
I explained that I thought my preference for older buildings and my self-employed status hindered mortgage applications. I’ve been told that banks don’t risk doling out loans for grand dames; tong lau, are virtually pipe dreams that require a cash purchase.
Ben corrected my line of thinking. Basically, the magic number is 70. A bank may be willing to lend money for a flat in buildings younger than 70 years as long as the age of the building combined with the term of the mortgage loan doesn’t exceed 70. In other words, if the building is 45 years old, then I should be able to get a 25-year loan. However, the percentage of the loan also depends on the age of the building; for newer buildings, it’s possible to get up to 90 percent of the estimated price through Hong Kong Mortgage Corporation’s Mortgage Insurance Programme for owner-occupied properties under $7 million. For tong lau, or buildings without a lift, 50 percent is about all that you can hope for. It works on a case-by-case basis for each building.
But how do banks view self-employed entrepreneurs? Ben admits that people with jobs just have to hand over their record of employment; for me, it’s a little trickier. He arranged for me to speak to Simon, a colleague who specialises in mortgage loans and who patiently answered this first-time buyer’s assortment of seemingly random questions. For self-employed candidates, he explained that banks will require three years of income tax receipts, my latest credit card statement and six months of bank statements as a way of reassuring them that I can afford the payments. Fair enough.
Chicken and Egg Scenario
In Hong Kong, the process of trying to get a mortgage is something of a catch 22. Banks will not process the loan until you have a signed Provisional Agreement for Sale and Purchase. This is a binding contract with basic information about the property such as its address, selling price and initial deposit — usually two to four percent of the total purchase price. The two parties then have a mutually agreed upon period of between 45 days to 60 days to get paperwork done before closing, including drumming up the cash for stamp duty and fees to agents and other consultants. During the interim period while you wait on pins and needles to hear if your application is approved, if either party changes his mind, they will need to return the initial deposit, plus a double penalty. In other words, if the deposit was $200,000 and you cannot go ahead with the purchase, you’d have to fork over $400,000. Ouch. That’s why it pays to be prepared, and to ensure that the bank is on your side before putting pen to paper on the provisional.
Any bank can assist with an evaluation on an existing property that you wish to purchase, and the process usually takes less than a day. But the evaluation may vary between banks; some are more aggressive and provide a higher value while others are more prudent. It is worthwhile shopping around; you may get more bang for your buck, as well as better interest rates and the type of service that suits you. Most banks work on the rate of prime minus a certain percentage; for Bank of China, it is prime minus 2.85 percent.
Keep in mind that in hot neighbourhoods, the bank’s evaluation may be nowhere near what the asking price may be. Sellers flipping properties know that they can get 20 to 30 percent more than the bank’s estimate for flats in demand; if you are really keen on the purchase, then you will need to come up with the difference on top of everything else. In other words, if your bank evaluates the property at $4 million and the seller isn’t budging on $4.8 million, you’ll need an extra $800,000 on top of the $500,000 to $2.4 million to get your dream home — and you should budget for it if you are looking in trendy areas.
Simon advised that there were a number of other things that banks look out for when processing a mortgage. Many older buildings have building orders placed upon them, and depending on how major the order, banks may just decline the mortgage application outright. Minor issues include common corridor repairs, while major ones would be extensive illegal additions. During my property search, I viewed a flat that had an entire apartment built on a terrace, complete with concrete walls and plumbing. The owner above subsequently built his own illegal addition on top, making the saleable flat’s addition virtually impossible to dismantle without a neighbour’s living room caving in. It is up to your agent to advise if there are outstanding building orders that you need to be aware of inheriting, and which could hinder whether your mortgage gets approved. Essentially, anything that deviates from the original building’s plan would be considered an illegal addition.
Another no-no is if a suicide or murder previously in the flat. Hong Kong is a superstitious city, and banks are the most cautious of the lot when it comes to protecting their own interests. The 2010 Josie Ho flick Dream Home, where her character goes on a killing spree in the building to drive down the price of a residence she wanted to buy, is based on the reality that banks won’t lend to an applicant who is considering purchasing a flat in a so-called haunted building. This is also something that your agent can help dig up, or you can speak with the building’s security guards; they typically know all the gossip.
Forewarned is forearmed when it comes to securing a mortgage. Ask other homeowners about their purchasing experience. They’ll help you make the right choices — if you ask the right questions.