Evolution and Development of Mortgage Services Provided by Banks

1. Evolution and Development of Mortgage Services Provided by Banks

2. Group Members Mike Chau Yick Cheung (053035) Cheryl Lam Ah Kuen (053037) Juvenia Luk (053049) Ivy Cheung Mei Lin (053061) Barbara Kwok Ching Ying (053107) Kendal Tai Siu Cho (053186)

3. Outline • Objectives • Definition • Current Mortgage Situation in Hong Kong • Considerations in Approving Mortgage • General Mortgage plan • Application of mortgage plans in different banks • Case Study • Conclusion

4. 1. Objectives • Since there are strong competitions on mortgage plans in banks, we think there is a need to let our classmates know more about this issue • To understand more about the current mortgage operation and plans in Hong Kong • To understand the recent development and innovation of mortgage in Hong Kong • To demonstrate how can people apply a mortgage plan

5. 2. Definition • Mortgage is defined by Section 2 of the Conveyance and Property Ordinance as "a security over land for securing money or money's worth".

6. 2. Definition • Every mortgage transaction comprises two basic elements: • The granting of a loan/facility by a lender to a borrower; and • The provision of security over land by the mortgagor (who may or may not also be the borrower) for the repayment of certain debts owed to the lender.

7. 3. Current situation in HK • Statistics from The Hong Kong Mortgage Corporation Limited: • There is a decline in the number of residential mortgage loans

8. 3.Current situation in HK • Hong Kong Monastery Authority’s monthly survey of residential mortgage lending: • New mortgage loans drawn down during February decreased by 30.5%

9. 3. Current situation in HK • The Mortgage War: • War or peace: banks split over mortgages (STANDARD), 12 March 2007 • HSBC rate cut set to spark mortgage war (STANDARD), 23 February 2007 • BOCHK keeps lead in mortgage market (STANDARD), 10 April 2007

10. 4. Considerations in Approving Mortgages • Credit Assessment • Income Situation • Risk Management

11. Credit Assessment HKMA requires banks • To collect and give careful consideration to all relevant information on every loan application. • To consider the borrower's integrity and employment aspects • Corporate entity: • Authority to borrow • Business expertise • Viability of its business • Management capability • Prospects of the industry

12. Income Proof Requirements For individual borrowers: • Latest tax demand note • Bank book /statements showing salary income • Employment contract/latest salary slip

13. Income Proof Requirements For company borrowers: • Latest tax demand note • Audited financial statements/latest management accounts • Bank book/bank statements

14. Credit risk management • To protect themselves - through prudent credit risk management • For example, requiring security for the loans • In general procedure, banks stick to the practice of not going beyond 70% of the valuation of the property • Use mortgage insurance programme to reduce the risk when the % loan to value is exceed 70%

15. The Mortgage Insurance Programme • Hong Kong mortgage market was originally provided only 70% of loan to value to the clients • In March 1999, it expand to 85% • August 2000, it expand to 90% • And July 2004, it further expand to 95% and this carry on until now • These change is good to consumer but creates more risk to banks

16. The Mortgage Insurance Programme • Mortgage insurance programme is then provided • It is an arrangement that protects lending banks against the risk of mortgage payment default by the borrower • The risk of the part which exceed the 70% value to loan • Will be beard by Hong Kong Mortgage Corporation Limited (HKMC)

17. The Mortgage Insurance Premium

18. The Mortgage Insurance Programme • It applicable to private, owner-occupied residential properties • The programme enables the bank to lend up to 95% of the value of the property depending on the loan size • <HK$12,000,000

19. 5. General mortgage plans • Regular installments of a fixed amount • The interest rate is usually changes according to prime rates • The repayment period < 30 years • Loan is <70% of the value of the house

20. Some new changes • Bi-weekly repayment plan • Under a fortnightly repayment plan • The mortgage repayment period can be shortened • Savings on overall interest may also be achieved

21. Some new changes • Progressive repayment plan • The amount of repayment installments accelerates periodically, • To speed up repayment of the whole loan • Saving the total amount of interest payable • This plan is suitable future periodic income increases and want to shorten loan period

22. Some new changes • Hibor (Hong Kong Interbank Offered Rate) • Interest rate: • Floating with (1month, 3months, 6months and 12 months) Hong Kong Interbank Offered Rate • usually will have a adjustment of 0.5%~1% • Loan amount: • Maximum 95% of the appraised value or transaction amount of the property is lower

23. HIBOR flow with 3 month Hibor • Max with P -2.75% • Market interest rate= P -2.75%~P -3%

24. 6. Applications of flexible mortgage plans in different banks • HSBC – Home Mortgage Loans • Bank of China • Standard Chartered Bank

25. HSBC • Names of mortgage plans: - HighAdvance mortgage - Free Choice Mortgage - Trading up - Investor Mortgage - Refinancing

26. HighAdvance mortgage • Loan ratio / Loan amount: - Up to 95% of the properties' values • Application:Simple

27. Free Choice Mortgage • Loan ratio / Loan amount: - Minimum mortgage loan amount of HK$500,000 • Application: New mortgage loans only

28. Trading up • Loan ratio / Loan amount: - Up to 95% of the property's value - Up to 70% with a normal mortgage loan, with a variety of home-related loans • Application: - Simple with HSBC assistance

29. Investor Mortgage • Loan ratio / Loan amount: - Up to 70% of properties' values - Minimum borrowing amount HK$200,000 • Application: - Easy and quick - Rental and assets are also counted as incomes - No annual reviews are needed

30. Refinancing • Loan ratio / Loan amount: - A wide range of home-related loans with home insurance • Application: - Simple and easy - HSBC assistance

31. Bank of China • Names of the mortgage plans: - Residential mortgage programmes for Primary market and Secondary market - HIBOR Mortgage Scheme - "All you want" Mortgage Scheme - "Smart" Mortgage Scheme

32. Residential Mortgage Programmes • For Primary market and Secondary market • Loan ratio / Loan amount: - Up to 95% of the properties' values • Application: No charges

33. HIBOR Mortgage Scheme • Loan ratio / Loan amount: - Up to 95% of the propertites' values • Application: No charges

34. "All you want" Mortgage Scheme • Loan ratio / Loan amount: N/A • Application: Simple

35. "Smart" Mortgage Scheme • Loan ratio / Loan amount: N/A • Application: Simple

36. Standard Chartered Bank • Name of the mortgage plan: - 95% Mortgage Insurance Programme • Loan ratio / Loan amount: - Up to 95% of the properties' values - Loan amount exceeds HK$12,000,000 - The maximum loan-to-value ratio is 85%

37. Standard Chartered Bank • Application: - No restriction on borrowers' age - Quick approval on application

38. 7. CASE STUDY

39. CASE STUDY • Mr. Bean is a self-employed professional lawyer and his job provides him a stable income at round HK$150,000 each month. He has targeted wonderful dream-house Evelyn Towers (雲景臺), at North Point Hill. The building is well known for luxury and it must be very expensive • Before he is going to join any mortgage plan, he decides to valuate his targeted house price. The following diagrams shown below are the process of the property that Mr. Bean has conducted the property valuation through the Bank of China’s website

41. CASE STUDY

42. CASE STUDY • After that, the house possibly costs him about HK$10,000,000 • He has inquired the banks for the various mortgage plans to suit him • There are his main considerations for the offered Mortgage plans

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45. CASE STUDY • No matter Mr. Bean has decided to join the 95% mortgage plan or the general one, he still needs to considerate with the amount of installment repayment in each month • If the amount of installment repayment in each month is more than his half of his monthly income (Optimal Installment amount = HK$75,000), he fails to apply the any mortgage plans • Fortunately, roughly estimated maximum loan amount provided by the bank’s website is more than enough for him to buy his dream house

48. CASE STUDY- CONLCUSION • For our conclusion, Mr. Bean is less likely to apply 95% Mortgage plan since it involves large amount of loan. • The banks treat this transaction as a special case if the loan amount is more than 7 millions dollars. • For the risk management, the interest rate is not only associated with the loan amount, but also the repayment method and repayment period.

49. CASE STUDY- interest rate • Here are the simplest four situations: • High loan amount needs higher interest rate and long repayment plan needs higher interest rate

50. 8. Conclusion 1. Fast means E.g. The95% Mortgage Insurance Programme provided by Standard Chartered : one hour to approve the applications of applicants  The approval of mortgage plans will be faster