The new Mortgage Insurance Plan has been extended to cover pre-construction homes. How this will affect home buyers

On 22 September, the Hong Kong Mortgage Corporation (HKMC) announced that the new mortgage insurance plan was extended to cover pre-construction properties.* Units priced at HK$10 million or less can enjoy a maximum 90% loan ratio.

On July 7, 2023, the Hong Kong Monetary Authority (HKMA) announced that mortgages for self-occupied homes would be relaxed, ranging from bank mortgages to the high-ratio mortgage insurance programme (MIP). Among them, owner-occupied homes worth HK$17.5 million or less can be mortgaged up to 70% for a maximum loan of up to HK$10.5 million. This MIP ratio relaxation was solely for completed flats and did not include homes under construction. Furthermore, the MIP scheme could only provide a mortgage insurance plan for a price of no more than HK$6 million in the primary market.

*Pursuant to the eligibility criteria of the MIP, properties under construction must be covered by the Lands Department Consent Scheme and scheduled for completion within 12 months from the drawdown dates of the mortgage loans. Properties not meeting these criteria will be considered case-by-case to assess risk. Homebuyers can consult banks to ascertain whether the MIP covers a property development project under construction.

The amended eligibility criteria will apply to mortgage loans for properties under construction for self-occupation with provisional agreements for sale and purchase executed on or after 22 September 2023.???

Developers usually offer cash payment and stage payment to buyers of uncompleted properties. Cash payment requires buyers to start mortgage payments before the home is completed. Therefore, they usually enjoy higher discounts – usually 3% to 5% or 6% to 10% - compared to the Stage Payment plan.

However, in the past, buyers could not take a more than 60% mortgage. They would choose the stage payment option, where they could apply for a high-ratio mortgage of 80% to 90% from the bank once the development is completed. Since the transaction period takes a long time, the bank constantly compares different surveyors’ valuations to check whether the deal price is valid, and they will keep reviewing the subject flat until one or two months before the occupation permit and certificate of compliance are issued. If the property market drops significantly, buyers may find their homes are not worth as much as they had agreed to pay.

With the upper limit on the MIP scheme being relaxed for uncompleted development, buyers can apply for a high-ratio mortgage immediately to avoid encountering the undervaluation problem later.

According to the latest statistics from Midland Research, 8,703 residential transactions were found in the primary market this year (as of 22 September), for a consideration of HK$104.67 billion, or an average of HK$12.03 million, up about 11.1% from last year’s average of about HK$10.83 million.

Average consideration in secondary residential market (2022 to 2023)

How much will this new change help buyers? To find out, I adopted an average flat price of HK$12 million to compare monthly repayments and the minimum income of stress tests before and after the interest hikes from 2021.

Then I assumed a new buyer would use a cash plan, a 30-year tenor capped at 4.125% (the actual interest rate was 6.54% on 22 September). The repayment amount would be HK$46,526, and the minimum income (stress test) would be HK$97,217. When I compared the past interest rate cap before the hikes, repayments would have been HK$37,931, and the minimum income (stress test) would have been HK$81,068. That is a considerable difference, 22.7% for the repayments and 19.9% for the stress test.

According to the latest statistics from the Census and Statistics Department (CSD) on 31 August 2023, about 122,000 employed people have a monthly income higher than HK$100,000. From the above mortgage calculation, few buyers will qualify for the maximum 80% LTV to purchase a HK$12 million pre-sold flat. The mortgage insurance programme for uncompleted properties may have been relaxed, but the stress test has not kept pace. Some buyers will still struggle to upgrade their homes if they consider uncompleted units.

I also checked repayments (HK$33,150) and minimum income (HK$69,267) for a HK$7.6 million mortgage. According to CSD’s statistics, only 308,000 buyers would qualify for MIP, at this price.

The new MIP relaxation may assist homebuyers in arranging mortgage loans as early as possible and avoiding devaluation concerns. But, based on the interest rate cycle and the US Federal’s latest statement – of one more interest rate hike this year – some economic analysts predict the interest rate will likely decrease in mid-2024. Buyers should consider their financial position and whether applying for an MIP mortgage is a good idea during the current elevated interest rates.

Buyers with limited budgets should save more money while waiting for interest rates to tamp down or choose “stage payment” so they won’t have to start repayments this year.

Many developers have been launching flats with attractive prices and even selling the first tranche below prices for existing developments in the surrounding area. Buyers must consider whether the discount offsets the risk of future devaluation if they plan to apply for stage payment.

Under the new measures, the proportion of buyers choosing MIP mortgages will increase significantly. Homeowners with new property mortgages no longer need to be limited to choosing payment methods during the construction period. They can enjoy higher discounts on property prices with immediate payment and avoid the risk of potential price adjustments during the completion period.

However, the current interest rate is still high, and the repayments are more than rent, which is the most critical factor affecting potential buyers’ market entry. Many will postpone their plans and bide their time in leasing. Therefore, I predict developers will push more entry flats with competitive prices to cope with new measures and counter the effect the interest-rate hike has on the stress test. ?