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These articles below can also be found in the April 15 - 31, 2009 issue of www.squarefoot.com.hk magazine:

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The bottom rung

Are you looking to get on the property ladder but unsure if the time is right? Alex Frew McMillan provides some essential tips for first- time buyers


This  is  a  punishing  time  for  property  owners, with prices heading  south  in a hurry, and only expected to fall for the rest of the year. But the downturn  is  prompting  some  people  to  start wondering  if  this  is  the  dip  they  have  been waiting  for  in Hong Kong’s notoriously  volatile market. They may not be willing to buy now, but they want to be ready when the market turns.

“My general philosophy  is not  to  follow  the pack,” says  John Fleet,  a  British-born  computer  programmer.  “I  just  want  to get in, even if it’s not at the bottom. I would rather get in at a point when I have got good value rather than waiting to get the maximum deal and then miss out.”

Pundits suggest Hong Kong’s property market could rebound quickly  once  confidence  returns.  So  it may  be  better  to  do your homework now  rather  than  trying  to buy  into a  rapidly rising market.

“There  is a  lot of money  sitting on  the  sidelines,”  says Chris Dillon. “People are waiting for that first glimmer of dawn, and then a  lot of people are going  to pile  into  the market.” Dillon is the author of Landed: The expatriate’s guide to buying and renovating property in Hong Kong.

“Figure  out where  you want  to  live  and  how much  you want to spend – do all of that now,” Dillon suggests. “In the typical Hong  Kong manner,  people  are  going  to  go  from  being  very pessimistic and despairing to optimistic in a couple of days.”

According to the Hong Kong University Real Estate Index Series, property prices had slowed their descent in December but were still down 10.8 percent  in a year, and 20.5 percent  in  the  last six months.

Fleet, who moved  to Hong Kong  15  years ago and has been renting  apartments  ever  since,  believes  the  declines  are starting  to  make  this  an  attractive  time  to  move  into  the market. But while many expats enter the Hong Kong property market early, he has no experience, and isn’t sure how to take the first step.

“When you go from scratch like I am, it seems like a minefield you have to wade through,” Fleet says. “There is a real need for basic information. I want to cut out any likelihood of problems, and I want to make it as safe and secure as possible.”

The  property market  can  seem  intimidating  to  enter,  largely because a home purchase is the biggest buy most people make in  their  lifetime. So  it’s understandable  that  first-time buyers can be put off by a lack of knowledge.

One  of  the most mystifying  procedures  in  buying  a  property for the uninitiated is applying for a mortgage. But lining up the financing and working out how much you can afford  is one of the first steps buyers should take.

So a visit to the bank makes a good first step, and it’s advisable to do this even before looking for a property agent. A mortgage banker can walk  first-time buyers through the buying process and  can  also  advise  on  whether  it  is  possible  for  them  to embark on a purchase. After all,  if you don’t know how much you can afford, going for an apartment that is HK$3 million or HK$4 million would be meaningless.

It  is  a  good  rule  of  thumb  that  your  mortgage  payments, together with all other debt repayments such as tax loans and personal  loans, should amount to no more than 50 percent of your  monthly  income.  In  the  current  financial  environment, banks are also being very conservative. They may require you to settle any other loans before they are willing to grant you a mortgage.

So how much house can you afford? For a  loan based on  the Hong Kong  Interbank Offer Rate  (HIBOR),  a  typical mortgage rate would  currently  be  around  2.5  percent.  Based  on  those rates,  for  a  monthly  mortgage  payment  of  HK$10,000,  you could borrow HK$2.5 million.

If  a  buyer  puts  down  30  percent  and  takes  out  a  30-year mortgage, that would mean he or she could afford an apartment that costs just over HK$3.5 million.

A mortgage banker can walk you through the figures.  Interest rates are, of course, currently very low, which makes mortgages attractive. But you have  to allow  for  the  fact  that  these  rates may escalate later in the life of the mortgage.

Though many  buyers  only  contact  the  bank  once  they  have agreed  to buy a property,  it  is possible  to get a pre-approval on  a  mortgage.  The  process  works  exactly  like  applying  for a mortgage  itself, with  the  sole exception  that  the buyer has not  yet  signed  a  Sales  &  Purchase  Agreement  (S&P),  which commits  them  to a deal. With a pre-approval,  if  the mortgage doesn’t  come  through,  you  are  still  free  to walk  away. Once you’ve signed the S&P, you would lose your deposit.

A  pre-approval  should  take  about  one week  to  process.  The application will  likely be quicker  if  your  income  is  consistent and you have a set salary – longer if you work on commission, have an irregular income or are self-employed.

When  property markets  are  rising  fast,  one week  can  be  too long to wait. But a pre-approved mortgage is a safer course to take for first-time buyers who may be unsure of their borrowing ability. It also removes the fear of losing a deposit on a property if you sign a deal to buy and only then discover you are unable to finance it.

In Hong Kong, banks will only  lend a maximum of 70 percent of  a  property’s  purchase  price.  That  means  it  is  normally necessary to put down 30 percent of the price you agree with the seller as a downpayment. This is often the biggest obstacle for first-time buyers.

For  an  apartment  that  costs  HK$1  million,  you  need  to  pay HK$300,000  in cash, and that’s ahead of other costs  involved in the deal, such as agent’s fees, legal fees and stamp duty, as well as any renovations, which also have to be paid in cash.

It is possible to secure a mortgage with a lower down payment. But the borrower has to work through the Hong Kong Mortgage Corp  (HKMC).  With  its  Mortgage  Insurance  Programme,  the bank provides 70 percent of the purchase price, and the HKMC tops up the mortgage with another 20 percent or 25 percent of the price, for a total mortgage of 90 percent or 95 percent of the property’s cost.

The  HKMC  (www.hkmc.com.hk)  says  it  backed  12  percent of  the  loans  granted  in  2007.  Although  the  programme  was initially designed  for buyers who plan  to  live  in  the property, the corporation started offering loans of up to 85 percent of the value of investment properties at the end of 2007.

With an idea of how much you can afford, you are ready to start your property search. The bank will help you value any property you are considering, telling you whether the price the seller is asking  is  reasonable and  in  line with what  the bank  is willing to lend.

Once a buyer and seller settle on a price, they sign a preliminary S&P then and there, outlining the terms of the purchase and the dates involved. The buyer puts down 5 percent of the purchase price as a deposit. Another 5 percent of  the purchase price  is due  in  two weeks, when  the buyer and seller sign  the  formal S&P, normally at the offices of their respective lawyers.

Completion  of  the  sale  –  when  the  remaining  90  percent  of the price  is due – normally  takes place  two or  two-and-a-half months later. These dates can be negotiated to some degree if you need extra flexibility. You then have that time to approach banks for the mortgage.

Although the procedure of paying 5 percent, 5 percent and then 90 percent of the price is standard, mortgage bankers say this is up to negotiation between the buyer and seller.

The  current  bear market may  not  be  the  ideal  time  to  ink  a deal. But  it’s a good  time  to start  the process of  figuring out what you can afford. “I can’t with hand on heart say this  is a good time to buy because there is no visibility here, we can’t say whether we have hit bottom,” Dillon says. “But it is a good time to do your research.” 


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