Hong Kong Tightens Mortgage Lending Rules
Wednesday, June 15, 2011

The Hong Kong Monetary Authority (HKMA) has issued revised guidelines to banks, requiring them to implement, with immediate effect, five measures to strengthen risk management in their residential mortgage lending business.

This is the fourth time the HKMA has introduced countercyclical supervisory measures since October 2009. Its Chief Executive Norman Chan said loan applications in respect of property transactions with provisional sale and purchase agreements signed on or before June 10 will not be affected.

The measures include a lowering of the maximum loan to value ratio to 50% for residential properties with a value between HKD10m (USD1.3m) and HKD12m. The 50% maximum loan-to-value ratio introduced in November last year will therefore be applicable to all residential properties with a value of HKD10m or above.

In addition, the maximum loan-to-value ratio for residential properties with a value between HKD7m and HKD10m will be lowered to 60%, with the maximum loan amount capped at HKD5m; and the maximum loan-to-value ratio for residential properties with a value below HKD7m will be 70%, with the maximum loan amount capped at HKD4.2m.

Meanwhile, if the principal income of the mortgage loan applicant is not derived from Hong Kong, the applicable maximum loan-to-value ratio will be lowered by at least 10% regardless of property types or values; and the maximum loan-to-value ratio for properties under the net worth-based mortgage will be lowered from 50% to 40%.

Chan said that, since the introduction of a series of measures by the government and the HKMA last November, the property market has still been volatile. Although the market cooled in March and April, there are now signs of renewed exuberance following high transaction prices recorded in recent government land sale auctions.

Since 2009, property prices in Hong Kong have surged by about 70%, although there were immediate signs that the latest set of measures are having the intended effect, with sales at several of Hong Kong's largest private developments having fallen by a more than a half since last week's announcement, according to Bloomberg.

Chan added that the authority has all along required banks to be prudent and vigilant in managing credit risk. As the boom cycle in the property market continues to evolve, the risks associated with banks’ mortgage lending business increase correspondingly. The HKMA said that it will continue to monitor the market situation closely and introduce appropriate measures when necessary to safeguard banking stability.

The Hong Kong Mortgage Corporation has also said it will lower the cap on the value of property that can be covered under the mortgage insurance programme from HKD6.8m to HKD6m.

As a result, for mortgage loans with insurance cover starting from 70% loan-to-value threshold, the maximum loan amount will be reduced from HKD6.12m to HKD5.4m, and, for mortgage loans with insurance cover starting from 60% loan-to-value threshold, the maximum loan amount will be reduced from HKD6m to HKD5m. The insurance will not be available to applicants whose principal income is not derived from Hong Kong.