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Mortgage Lesson 3: the risks of getting a mortgage

1. Risk of lower-than-expected valuation

It has recently been reported that a home buyer had to forfeit the down payment on a property because the bank’s valuation was lower than expected. The first step to avoid such unnecessary loss is to find out the current value of a property through your bank. This information can be used to estimate your total mortgage expenses and be used as a reference when negotiating the selling price with the property owner.

Valuations can be obtained from a bank in two ways – one is through the internet and the other in person. However, we do not encourage online valuations due to two reasons. First, the property market’s fluctuations make it impossible for the valuation to catch up with the current market price. Second, not all banks offer an online valuation service. Therefore, your safest bet is to provide relevant information (for instance, the address of the property and contact information) on the bank’s mortgage page, and wait for a mortgage consultant to get in touch with you. Citibank’s website provides online valuation and online enquiry service.

HIBOR-based mortgage

Along with the United State’s economy recovery, it is estimated that the interest rate could be raised in the second half of the year 2015, which would undoubtedly affect your mortgage. Take the lowest available interest rate H+1.7% (which adds up to 1.94%) as an example - if the interest rate is raised by 0.75% or 1.25%, how would it affect your interest?

If the loan amount is 2.8 million with a 25 year loan tenor, then each installment would be vastly increased by 8.9% (a raise of 0.75%) or 24.6% (a raise of 1.25%). However, you may opt for a HIBOR mortgage plan with a cap to lower the risk of raised interest rates.

For instance, Citibank’s HIBOR-based mortgage plan has a cap of P-3.1%, according to the current P-rate (HKD Prime Rate) of 5.25%, with a cap of 2.15% and a fixed HIBOR of 0.21%. If the loan amount is 2.8 million with a 25 year loan tenor, each installment would increase by 2.4%, which is significantly lower than that of 8.9% or 24.6%.

You might be thinking - wouldn’t Prime rate also increase? Yes, but much slower. In the previous interest rate hike cycle (from 2004 to 2006), the Federal funds rates increased by 4.25%, and HIBOR increased by 1.18% (from 0.09% in May 2004 to 1.27% in Feb 2005). On the other hand, the Prime rate didn’t start rising until March 2005, with an increase of 5% over a year, reaching 8% in Apr 2006. Therefore, it is safe to estimate that although the U.S. may start raising rates in 2015, the earliest it will affect the HKD Prime rate would be one year from now. This is why a HIBOR-based mortgage with a cap is considered a better deal.



Fixed-rate mortgage

As experts predict that the U.S. will raise the interest rate, only a handful of banks offer a fixed-rate mortgage nowadays. But what exactly is a fixed-rate mortgage? The name itself suggests that it will provide lenders with a longer fixed interest rate period (usually 3 years). If you predict the interest rate will increase in the coming three years, this type of mortgage can help you stabilize your mortgage expenses.

In Hong Kong, only Citibank is offering a fixed-rate mortgage.

Again, take a mortgage with a loan amount of 2.8 million and a 25 year loan tenor as an example.

If the interest rate for the first 3 years is 3%, and subsequently P-2.4%, the monthly installment would be HK$13,278. Assuming that the mortgage interest increases by more than 1.06% in the coming three years, then the fixed-rate mortgage can help you lower your mortgage interests.

Deposit-linked Mortgage

This type of mortgage will be linked with a deposit account, which enjoys a deposit interest rate equivalent to the mortgage loan interest rate.

1. If your deposit is equal to the mortgage installment, you will be able to offset the monthly mortgage expense.

2. There is no minimum deposit, and the more you save, the higher the return. You can withdraw money from the linked deposit account anytime, just like other saving accounts.

3. The only restriction is that the saving deposit balance of the first few years cannot be higher than 50% of the mortgage. Of course, when mortgage rates go up, the interest return would be higher than a regular savings account and thus cancel out the extra mortgage expenses caused by increased rates.

Provided that your loan amount is 2.8 million with a 25 year loan tenor, and the U.S. has raised rates from 0.75% to 1.25%, this will cause your installment to increase by $1,045. To make up for the increased monthly payment, a deposit of HK$466,171 in the savings account will be needed.

Want to compare different mortgage plans? Visit MoneyHero for a comprehensive guide of mortgage plans in Hong Kong!