While the market remains positive in the wake of changes to the Mortgage Insurance Plan, would-be buyers need to be familiar with one crucial factor

The March residential sales figures are in, and the Mortgage Insurance Plan changes seem to be working their magic. Now it’s time for new buyers to think about the tenor of their mortgages and what is best for them.

Tenor refers to the length of the mortgage, say 30 years, vs 15 years. Simply put, those who have the money try to pay off their mortgages as fast as possible to save on interest, which means higher monthly repayments over a shorter tenor. Younger or money-conscious buyers might think a lower monthly repayment is the best option, considering their budget. But there is also one crucial factor buyers need to bear in mind.

The MIP changes were announced by the financial secretary Paul Chan Mo-po during his Budget Speech on 23 February 2022, making March the first full month where their influence can be felt. Buyers of homes under HKD12 million can now enjoy an 80% mortgage, and those who buy homes under HKD10 million are eligible for a 90% mortgage. The figures show that the market in these price ranges benefitted, although I believe the new rules are responsible for only around 65% of total sales.

The secondary market for the HKD10 million to HKD12 million range outperformed, registering a 5.6% MoM gain in value, with Kowloon being the top-performing district. Overall, March's transaction volume totalled 1,527 against February’s 1,378. Kowloon racked up 51 sales, up 79% from February’s 29. But the New Territories was the decisive winner in volume with 93 transactions, up 63.2% from 57 sales in February. Hong Kong Island recorded 53 transactions, up 32.5% from 40 in February.

I believe that transactions in this sector will continue to increase as home buyers benefit from the new MIP rules.

Source from HKET/Centaline

There were 197 transactions in the HKD10 million to HKD12 million range in March, up 56.3% from February’s 126. It is not hard to deduce that this significant increase was primarily due to the MIP rules change, but we cannot overlook other factors such as immigration and social distancing measures relaxing.

Homes from HKD8 million to HKD10 million recorded 443 transactions, 8.3% up MoM from February’s 409. The market for homes under HKD8 million recorded 1,527 transactions, for a 10.8% MoM bump. On the other end of the scale, homes ranging from HKD12 million to HKD20 million recorded 237 transactions, up 3.9% from February’s 228.

It is clear that these three categories have not yet benefitted from the MIP changes.

Source from HKET/Centaline

As we can see, the MIP-affected market segments are gaining momentum. But what factors in the programme will affect where buyers can find homes to suit their budgets? This is where that crucial loan tenor comes in as it controls the amount buyers will need to pay regarding interest and preimium for their mortgage plan.

1)  Tenor refers to the length of time between when a loan is taken out until it is due. Major banks will use two ways to arrive at the loan term. First, “75 - age of the property,” and the second is “75 – the applicant’s age”. Both are capped at 30 years for a standard mortgage or the MIP. The bank will always choose the shorter tenor.

2)  Buyers need to pay a premium when applying for MIP. This premium calculation is based on the tenor and loan amount x % (premium rate in Table 4).

I have calculated the total interest on a loan and the monthly repayments for tenors of 15, 20, 25 and 30 years in standard mortgage cases. I made the following assumptions; the total interest would be 2% of the interest rate, the applicant would be a first-time buyer with a 60% LTV and the property would be a starter flat worth at least HKD 4 million.

Most people who buy start flats as first-time buyers are under the age of 45 and normally have limited funds for the downpayment. Therefore, they are highly likely to choose the 30-year tenor to get the lowest monthly repayment, and besides, the difference between the total interest for shorter tenors does not appear to be significant. Their target price range could be under HKD10 million but would most likely be below HKD8 million.

On the other hand, luxury-flat buyers can better access finance and possibly have significant savings. But, they will likely shy away from the maximum tenor because they can afford higher repayments and save on interest. For a home in the HKD12 million to HKD20 million bracket, they would pay total interest of HKD1.97 million on a 25-year tenor and HKD3.9 million on a 30-year tenor.

When making long-term financial plans, buyers also need some sense of what will happen to interest rates in future. So, they will tend to go for the 15 – 20-year tenor to keep financial risk low.

Source from 28. Hse (for estimation)

Based on the factors above, we can find a pattern in the transactions of 2021 and the first quarter of 2022.

If buyers choose a home built more than 45 years ago, they cannot apply for the 30-year mortgage tenor. More than 90% of urban buyers in the HKD20 million and under bracket chose urban convenience over the longer tenor, so they must be able to make that downpayment and heavy repayments.

New Territories transactions comprised 42.7% to 67.3% of the total volume. The figures reflect the ample supply of more recent developments and the relative ease of getting that 30-year tenor. What’s more, buyers can enjoy a broader range of prices to suit their pockets and generally, the flats are larger than those in urban areas. Younger buyers and first-time buyers like to seek apartments in this district.

They will usually move on after a few years. Therefore, a high overall high interest is of no consequence to them.

On the other hand, banks also consider an applicant’s age when deciding the tenor. Hong Kong’s residential investors are usually older than 45, limiting their possible tenor. They, too, would consider the total interest expenses. They prefer a short tenor for lower interest and don’t mind higher monthly repayments.

Source from sorting our transactions in Memfus Wong

A mortgage is a financing product for people who have a stable income. But, given recent events, we are reminded how easily financial stability can be lost. Therefore, it is wise to build a cash reserve to ensure mortgage payments can continue in the event of financial stress.

It also means that we must be aware of our financial ability, never bank on interest rates remaining low and pay attention to how a tenor will affect our ability to maintain mortgage repayments.

Thank you