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These articles below can also be found in the 1 - 15 Dec 2008 issue of Square Foot magazine:

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Bet your house on it

Given the times, it’s a tempting idea, if you own your own home, to borrow against it to support a small business. Alex Frew McMillan explores the pros and cons

Small businesses - often dubbed ‘small and medium enterprises’ in official and bank jargon - are the lifeblood of a thriving economy.

Joe The Plumber became an icon of the recent US election for good reason. Not because he is called Joe, since his full name is Samuel Joseph Wurzelbacher. And not because he is a plumber, either, since he isn’t licensed. He stands for the small business.

The current downturn may encourage many people who find themselves out of a job finally to go it alone. But such would-be entrepreneurs, looking to borrow against their own homes, will find it hard to attract much interest from banks at the moment. There’s not much crunch in credit - requests for lending are likely to be met with an empty echo.

According to GFI Colliers, traders have priced in a 12 percent decline in property prices by the end of this year, based on derivatives from The University of Hong Kong Real Estate Index Series (HKU-REIS), which itself fell 2.5 percent in August.

In better times, you’d be able to draw some money out of your home. Assuming it has gone up in value since you bought it, most banks will lend up to 70 percent of a home’s value. Even if you borrowed at that level some time ago, you can approach the bank to refinance back to 70 percent of the current value.

But using your home as an ATM is the kind of strategy that ran afoul for many US borrowers when prices slumped. With property prices dipping in Hong Kong, banks are not keen to lend, and service providers are telling their clients to go it alone.

“In the past, I have had loads of clients who have pledged their properties, either their homes, offices or factories, to the banks in return for general banking facilities such as bank overdrafts, bank loans, packing loans, trust receipts, bills, and so on,” says Suzanne Liu Duddek, the owner of the accounting firm S. Liu & Co.

But that was when times were good. Lenders are now running for cover. They’re much more keen to make the guaranteed rates they can fetch lending to each other, at the Hong Kong Interbank Offer Rate (Hibor), than to risk loaning money to a long-term borrower looking for a home loan or to fund a business.

“The economic climate has changed from bad to worse,” Liu Duddek says. “Hibor is at an all time high. Banks are reluctant to lend, at present - they are holding on to cash and waiting to see what happens.”

“I am not sure we would be recommending clients to borrow against their own homes,” HSBC spokesman Gareth Hewett wrote in an email. “In fact, collateral is probably not the key issue in the current environment - it is lack of liquidity.”

HSBC has a commercial mortgage on offer that in theory lets business borrowers mortgage up to 70 percent of a company property, either as an investment for the company or to help a business expand.

But HSBC has taken the lead on raising mortgage rates, even though interest rates have been falling. Most recently, it raised its mortgage rate to 3.5 percent on loans of less than HK$1.5 million, or 3.25 percent for loans over HK$1.5 million, despite the prime rate staying unchanged at 5.25 percent in Hong Kong in the third quarter.

It ignored the most recent interest-rate cut, of half a percentage point, by both the US Federal Reserve and the Hong Kong Monetary Authority. With the three-month Interbank rate around 3.35 percent in Hong Kong, it makes more sense to lend to other banks than home buyers.

Other banks followed suit in raising mortgage rates. They have also been reducing the loan-to-value ratios they’re willing to offer and getting very conservative on their valuations. So even if your home or office has grown in value, banks are unlikely to lend against it, and if they do, it’s unlikely to be at attractive terms.

“At this point, I suspect the banks will be very twitchy about using property as security, especially if property values continue to drop,” says Chris Dillon, the author of Landed, a primer to buying and renovating real estate in Hong Kong.

A small businessman himself, Dillon runs a public-relations agency in Hong Kong, Dillon Communications, and a studio that is often rented out for photographic shoots.

“The vast majority of small businesses are funded by savings, and the next sort of thing that happens after that is that you go cap in hand to family and friends,” Dillon says. With the banks so risk-averse, he thinks that’s definitely the way to go now.

It’s quite a contrast from the normal state of affairs, when banks court small-business lending like it’s both a public good and good banking sense.

However it is, of course, still possible for lucky lenders to get themselves a loan.

“Owners of small and medium-sized enterprises are always welcome to charge their real estate in Hong Kong (e.g. shops, offices, residential property, etc.) to the Bank of East Asia as collateral to finance their businesses,” the bank’s Marketing and Communications Department wrote in an email.


“The financing ratio will range from 50 percent to 80 percent of the market value of the real estate, depending on the nature and quality of the property to be charged. Of course, our bank must still review the repayment source of the mortgage (i.e. from the business or elsewhere) before agreeing to such an arrangement.”


Translation - it better be a good business if you want to borrow against your home to fund it, preferably one that doesn’t need a loan at all.


“Banks look at covering their own interests first, and charity is not their strong suit,” Dillon says. “In downturns like this you have a lot of people that go from being employed to being entrepreneurs. Banks will look at that and look at it very sceptically because people are doing it from a position of weakness.”


Borrowers looking to fund a small business may fare better with smaller lenders such as Fubon Bank, Wing Hang Bank and Wing Lung Bank, which tend to be more aggressive in their lending than the ‘big boys’.


But lenders are being particularly cautious in this downturn. “The turtles have all pulled their heads into their shells,” says Dillon.


Even if the banks aren’t being particularly helpful, the Hong Kong government has set up loan schemes for small businesses that may be of benefit.


The SME Loan Guarantee Scheme is designed for small and medium enterprises - manufacturers with fewer than 100 employees, or non-man manufacturers with fewer than 50 - to help them secure loans from banks.


Under the scheme, Hong Kong’s Trade and Industry Department will guarantee loans of up to HK$5 million for equipment purchases or to install machinery, or will guarantee a loan of up to HK$1 million for working capital. A bank has to decide that the company merits the loan, but the government will absorb the risk.


The money for equipment purchases can be used to buy machinery, computers, office equipment, furniture and even fixtures such as lighting and air-conditioning systems, but can’t be used for decoration.


Of the 4,272 applications that the government had received for the business installations and equipment loan guarantee scheme as of the end of October, it had approved 90 percent, or 3,856, backing a total of HK$1.4 billion in guaranteed loans to 35 different banks.


Under a related scheme for business installations and equipment, the department had received 15,123 requests and had approved 92 percent, or 13,886, for a total of HK$7.7 billion in guarantees to 31 banks.


There are more details of the schemes along with the contact information for the participating banks at the website: www.smefund.tid.gov.hk/eng/eng_main.html.


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