Read the Fine Print when Financing Your Home

Financing a home purchase in Hong Kong may be transparent, but it is crowded with pitfalls that buyers need to watch out for.

We all know the process – mostly. Scrimp and save at least $2.4 million if you’re looking at a $6 million flat (maybe less if you take up a developer’s offer of 90% financing). Find a home, pay the deposit and apply for your mortgage. Of course, if you’re turned down for a mortgage, your deposit is forfeited and you have to come up with another $2.4 million. Welcome to buying a flat in Hong Kong.

Stress Test
As crazy as that may seem to most of us, those are the rules of the game in Hong Kong. There is no third party escrow holding account, no applying for a mortgage first or shopping around to see if it’s possible to get one before forking over one’s life savings – not in any meaningful sense.

“Well you can get a pre-approval from your bank. The question is whether or not the pre-approval is legally binding,” explains Hong Kong real estate writer Christopher Dillon.

“There’s pre-approval and there’s indicative approval, which is based on your credit history and years of business, and with all things being equal [they’ll] give you a mortgage. However, there is also the element of what the mortgage is on.”

As is well documented, buildings with a “4” in the address, buildings a certain age and anything “haunted” is almost an automatic rejection. Most lenders cite poor re-saleability as the reason.

In many overseas jurisdictions, purchase agreements are often made contingent upon financing approval. It’s a common practice that protects a buyer’s considerable investment and reduces their risk exposure.

It’s unusual in Hong Kong, but there’s no rule or law that states prospective buyers nervous about their mortgage chances can’t include a clause to that effect – though it would also need the vendor’s approval. Nonetheless, forfeiture of the down payment is standard practice.

While it may be true most applicants are approved for mortgages (and most with doubts don’t even try) there is always a chance for rejection.

“Banks are notorious for being completely lacking in imagination,” Dillon says. “Anyone who is self-employed or something like that is baffling to them. You would be far better off in a lower-paying, salaried job with a regular income. It’s much easier for them to understand.”

So freelancers and SME owners run the risk of losing their deposits. Whether existing forfeiture rules change given the considerable 40% now required remains to be seen.

Despite the July and August transaction blip, prices have indeed come down, and the continuing, unprecedented low interest rate environment remains a catalyst for sales activity.

The US Fed is expected to hike interest rates again very soon, which could also be spurring activity. Whether the Fed’s move has any effect on Hong Kong’s rates is another question (the last one didn’t), but all those “wait-and-see” buyers are acting.

An Offer You Can’t Refuse
Of course, one of the easiest ways to mortgage these days is through either bypassing the banks altogether or taking developers up on their generous offers of 80% to 140% financing on primary sales – which some recent buyers have opted to do, resulting in the summer spike. Another choice is financing through consumer lenders.

“Banks are part of a cartel. It’s HIBOR or prime minus one or whatever. If you deal with finance companies the terms are less advantageous and you pay higher rates … they can be more flexible, but you’re paying for the privilege of not being regulated the same way the banks do,” Dillon says.

Recently, Convoy Global and ETC Finance, both consumer lenders, partnered with major realtors Centaline, Ricacorp and Midland to offer more options to potential buyers. They are also more aggressive, offering up to 90% on residential, retail and industrial property and more generous LTV ratios on properties over $8 million.

Their interest rates are up to 2.5% below Hong Kong’s 5.25 prime rate, and most importantly, consumer lenders are not subject to the same lending limits that banks are.

Regulation of consumer lenders comes via the Money Lenders Ordinance and falls under the purview of the police. (It’s worth noting that the Ordinance’s prohibition of excessive interest rates states any lender charging, “An effective rate of interest which exceeds 60 per cent per annum commits an offence.”)

Another option for primary market purchases is developer incentives that include 90% financing in some cases. Better still is 120%, 130% or 140% mortgage financing. In the latter case, financing is contingent upon selling a currently owned property in order to finance a new one; the buyer must be upgrading.

If the current home is valued at $4 million and a new $7 million flat is under consideration, the 130% financing developers are offering effectively provides potential buyers a $5.2 million deposit.

This is one of the most complex and potentially costly options available, and only benefits a miniscule percentage of the buyer pool.

How long developers’ aggressive practices will continue is anyone’s guess, although Dillon says it will go on “Until the boom comes down”.

Given the current relationship between the government and developers isn’t as cosy as it has been in the past, and the HKMA is trying to keep a lid on banking, that could be sooner rather than later.

Referring to the generous financing incentives, HKMA deputy chief executive Arthur Yuen wrote on the regulator’s website: “While property developers are outside our supervisory ambit, the fact that banks lend to property developers which, in turn, provide mortgages to homebuyers, indirectly increases the potential credit risk faced by banks … the HKMA considers this is a cause for concern, and therefore has been discussing with banks and studying the need of introducing appropriate measures with a view to strengthening the risk management of banks in respect of loans provided to property developers offering mortgage loans with high loan-to-value ratios.”

Whatever the case may be, it’s crucial purchasers have good legal counsel.

Finishes Dillon: “This is very much a caveat emptor market. I would look very, very closely at anything I was signing, especially anything that was out of the ordinary.”