HKMA issues measures on residential mortgage lending business

Signs of renewed exuberance on the market have become evident following high transaction prices recorded in recent government land sale auctions.

The Monetary Authority issued guidelines on Friday to banks, requiring them to implement five measures to strengthen risk management in residential mortgage lending business. Measures taking immediate effect include lowering the maximum loan-to-value ratio and the loan amount capped.

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

• the maximum loan to value ratio for residential properties with a value between $10 million and $12 million will be lowered to 50%. The 50% maximum loan-to-value ratio introduced in November last year will be applicable to all residential properties with a value of $10 million or above;
• the maximum loan-to-value ratio for residential properties with a value between $7 million and $10 million will be lowered to 60%, with the maximum loan amount capped at $5 million;
• the maximum loan-to-value ratio for residential properties with a value below $7 million will be 70%, with the maximum loan amount capped at $4.2 million;
• 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 percentage points 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%.

Mr Chan said since the introduction of a series of measures by the Government and the authority in November the property market has 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.

He said the present unusually low interest rate environment will not last forever, adding property prices have exceeded their peak levels in 1997 and the interest rate risk is also much higher than that in 1997. Mortgage rates then were usually more than 10%, while present mortgage rates are only about 1%.

Mr Chan said 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 authority will continue to monitor the market situation closely and introduce appropriate measures when necessary to safeguard banking stability.

The Mortgage Corporation said it will lower the cap on the value of property that can be covered under the Mortgage Insurance Programme from $6.8 million to $6 million.

As a result, for mortgage loans with insurance cover starting from 70% loan-to-value threshold, the maximum loan amount will be reduced from $6.12 million to $5.4 million. For mortgage loans with Mortgage Insurance Programme cover starting from 60% loan-to-value threshold, the maximum loan amount will be reduced from $6 million to $5 million. The insurance will not be available to applicants whose principal income is not derived from Hong Kong. 

The changes will apply to Mortgage Insurance Programme applications with provisional sale and purchase agreements signed on or after 11 June. For homebuyers who have executed the provisional sale and purchase agreement on or before 10 June, their mortgage loan applications can be submitted by the participating banks for processing in accordance with the existing scope and criteria of the programme.