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2020-08-25 | Author:
The government recently increased the maximum loan amount for 90% mortgages (applicable for first home buyers) up to a maximum of HKD $8 million in value. The maximum loan amount for an 80% mortgage has been increased up to a maximum of HKD $10 million in value.
Down payments will be lower under this revision. Non-first-home buyers may be required to pass income and stress tests before they qualify, however, these tests are considered quite easy to pass. First-time homebuyers can be excluded from the stress test and be eligible to borrow up to 90% of a property’s value (Loan-To-Value) worth up to, but not exceeding, HKD $8 million. Nevertheless, eligible first-home buyers under this scenario will be subject to an additional 15 % premium for mortgage insurance and must still meet the HKD $60,354 in income requirement.
Many people say that if you buy a home jointly with somebody else acting as a guarantor, then it would be easier to meet the income requirements. While this is true, if the guarantor also has an existing mortgage, then they will be required to pass the stress test. It’s worth remembering that the stress test for borrowers with an existing mortgage is more difficult to pass compared to those without an existing mortgage. Also, if you are a first home-buyer and you use a guarantor to buy a home this way, you won't be eligible for the stress-test waiver in the future, providing you still have an existing mortgage.
Q: Anyone can be a guarantor?
Answer: Theoretically, the guarantor needs to be a close relative to the borrower. Unmarried couples can also be considered close relatives, however, this must be declared to the bank.
Q: If a guarantor is added, how will the mortgage stress test be calculated?
Answer: The income and liabilities of the borrower and guarantor will be combined and the stress test should be counted as a unit. For example, the borrower's income is $10,000, and the guarantor's income is $20,000, the total combined income will be $10000 + $20000 = $30,000. If the guarantor has a mortgage or other mortgages secured, those mortgage debts will also be counted in the stress test. Note that if the guarantor has an existing mortgage, the stress test and income ratio requirements may differ depending on their income contribution.
Q: How many guarantors can there be?
Answer: There are no restrictions.
Q: Assuming person A guarantees person B's purchase of a home with a monthly mortgage payment of $10,000, will the $10,000 payment be included in person A's stress test if person A wants to buy a home on their own in the future?
Answer: Yes. Person B’s $10,000 mortgage payment will be fully included in person A's stress test. If person A buys a building again, an income-ratio of approximately 40/50 will be used to calculate the stress test. Of course, at that time, person B can also counter-guarantee person A. But regardless, person B’s $10,000 mortgage payment will only be counted once. Either way, if two buyers both counter-guarantee each other, then the stress test for any additional purchase thereafter by either person will be calculated as if the buyer was buying a property independently.
Q: Do I have to pay a penalty for dumping my guarantee ?
Answer: If the buyer is able to prove at any point that they generate enough income, they can simply choose to remove the guarantor without penalty and the guarantor won’t need to sign any papers.
However, as guarantors, there are a number of risks:
Risk (1): Reduced purchasing power
Suppose John wants to get on the property ladder and buy a HKD $5,000,000 home, but John’s monthly salary is only HKD $20,000. Even using a 90% loan, the maximum John can borrow is HKD $4,500,000. Regardless, John would not pass the bank’s stress test and the upper limit of the monthly contribution rate. However, if John’s older sister, Jane, has a monthly salary of HKD $30,000 then Jane is able to act as a guarantor for John if she agrees. If Jane then decides she wants to buy a house of her own in the future, she needs to be aware that her own purchasing power will be reduced because any new loan she applies for must be subject to a 10% reduction. For example, let’s say Jane wants to buy a HKD $6 million property. Normally, Jane would be able to borrow up to 80% of the property’s value which means that Joan could borrow HKD $4.8 million. However, because Jane is already guaranteeing the loan of her younger brother, Jane’s loan will have to decrease by 10%; from 80% to 70%. This means that Jane is only eligible to borrow up to a maximum of HKD $4.2 million.
Risk (2): High degree of risk
If John can’t afford to pay his mortgage, then it will be up to Jane to help cover John’s mortgage payments.
But if Jane wants to buy a house in the future, and she doesn’t want to reduce her purchasing power, what options does she have?
Method (1): Remove guarantor status
If John’s economic situation has improved and he can now demonstrate that the income contributions from his salary meets the bank’s stress test, then he can suggest that Jane be removed as a guarantor.
Method (2): Find someone else who does not have a mortgage to act as a willing guarantor
If the young man has the economic ability and ca n’t afford the mortgage on his own, ah, he has the urgent need to buy a home. In fact, as long as you find a qualified guarantor, you can remove the status of guarantor guarantor, and you can get on the car without having to leave the guarantor's status. However, each bank has different requirements for the guarantor of the repurchase, and the final approval result depends on the actual situation.
If John really wants to buy a home but he can’t afford a mortgage on his own and his family members already act as guarantors for other people, then there are still alternative options for John. As long as he can find a qualified and willing guarantor, then they can help him meet the eligibility requirements to buy his home and get on the property ladder.