HK Developers Offering 120% Mortgages as Sales Slump

Hong Kong developers are offering mortgages up to 120 percent of the value of a property with attractive borrowing rates in a bid to boost sales, though some including the Hong Kong Monetary Authority (HKMA) believe this scheme will keep prices artificially high while increasing risks to borrowers according to a recent report in the Wall Street Journal.

In the wake of a slowdown in demand, developers including Hong Kong’s largest builder by market value Sun Hung Kai Properties and billionaire Li Ka-shing’s Cheung Kong Properties are enticing buyers with bridge loans, or short-term financing with lower interest rates compared to banks, to buy units in their latest projects.

Deals Include Lower Introductory Rates

These interim loans have an introductory rate for three years after which the borrower must refinance either with a bank or the developer, typically at a higher rate.

For example, Sun Hung Kai offers a loan plan for units at its Park Yoho Venezia project located in the New Territories at a rate of 2.15 percent for three years, after which the rate would rise to 4 percent if the homeowner applied for another loan according to the developer.

The high loan-to-value amount also circumvents regulation restricting banks to lend at a maximum 60 percent on the value of a home since developers offer these above-100 percent loans from their own financing units.

Though these products may seem attractive to buyers in a city where affordability remains increasingly constrained, developers’ focus on boosting sales rather than cutting prices presents risks to buyers.

Betting That the Market Will Go Up

According to a representative of Savills Hong Kong, after the three-year period is up, buyers are betting the value of their home increases or remains steady in order to refinance or sell their home.

If it doesn’t, many will fall into negative equity, or owing more on a mortgage than the value of the home, which increases the chances of foreclosure. Underwater residential mortgages in the city increased from 95 cases in December 2015 to 1,307 at the end of June according to the HKMA.

Though Sun Hung Kai denied any intention to increase buyers’ risks, analysts indicate Hong Kong property prices are likely to stay high if developers continue to dodge bank mortgage rules rather than slash prices, which already picked up since March according to HK-based Centaline Property Agency.

“Although generally the market is softening, all these countermeasures from the developer help to slow down the decline in the pricing,” JLL Hong Kong Managing Director Joseph Tsang told the Journal. “It helps to maintain the price at its [current] level, which is not healthy.”