evolution and development of mortgage services provided by banks

Evolution and Development of Mortgage Services Provided by Banks

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)

Outline

1. Objectives

2. Definition

3. Current Mortgage Situation in Hong Kong

4. Considerations in Approving Mortgage

5. General Mortgage plan

6. Application of mortgage plans in different banks

7. Case Study

8. Conclusion

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

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".

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.

3. Current situation in HK

Number of Residential Mortgage Loans(including Securitised Mortgage Loans)

70000

71000

72000

73000

74000

75000

76000

77000

78000

Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07

Statistics from The Hong Kong Mortgage Corporation Limited: There is a decline in the number of residential mortgage loans

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%

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

Credit Assessment Income Situation Risk Management

4. Considerations in Approving Mortgages

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

Income Proof Requirements

For individual borrowers: Latest tax demand note Bank book /statements showing salary

income Employment contract/latest salary slip

Income Proof Requirements

For company borrowers: Latest tax demand note Audited financial statements/latest management

accounts Bank book/bank statements

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%

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


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)

The Mortgage Insurance Premium


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

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

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

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

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

HIBOR flow with 3 month Hibor

Max with P -2.75%

Market interest rate=

P -2.75%~P -3%

6. Applications of flexible mortgage plans in different banks

HSBC – Home Mortgage Loans Bank of China Standard Chartered Bank

HSBC

Names of mortgage plans:

- HighAdvance mortgage

- Free Choice Mortgage

- Trading up

- Investor Mortgage

- Refinancing

HighAdvance mortgage

Loan ratio / Loan amount:

- Up to 95% of the properties' values

Application: Simple

Free Choice Mortgage


- Minimum mortgage loan amount of

HK$500,000

Application: New mortgage loans only

Trading up


- 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

Investor Mortgage


- 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

Refinancing


- A wide range of home-related loans with

home insurance

Application:

- Simple and easy

- HSBC assistance

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

For Primary market and Secondary market

Loan ratio / Loan amount: - Up to 95% of the properties' values

Application: No charges

Residential Mortgage Programmes

HIBOR Mortgage Scheme


- Up to 95% of the propertites' values

Application: No charges

"All you want" Mortgage Scheme

Loan ratio / Loan amount: N/A

Application: Simple

"Smart" Mortgage Scheme

Loan ratio / Loan amount: N/A

Application: Simple

Standard Chartered Bank

Name of the mortgage plan:

- 95% Mortgage Insurance Programme


- Up to 95% of the properties' values

- Loan amount exceeds HK$12,000,000

- The maximum loan-to-value ratio is 85%

Standard Chartered Bank

Application:

- No restriction on borrowers' age

- Quick approval on application

7. CASE STUDY

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

CASE STUDY

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

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

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.

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

8. Conclusion

1. Fast means

E.g. The 95% Mortgage Insurance Programme provided by Standard Chartered : one hour to approve the applications of applicants

The approval of mortgage plans will be faster

2. Different repayment plans Banks offer a number of repayment options to suit

the different needs and budgets for their customers,

E.G. Bi-weekly repayment plans Flexible prepayment and redrawal plans Progressive repayment plans Delayed principal repayment plans Straight-line repayment plans

3. From July, 2004 on

Loan-to-value ratio (LTV ratio) :

Increased from 70% to 95% in the past

Amount of mortgage greatly increased

Innovation

Trend of mortgage plans: on the track of innovation, tailored made to applicants

~ Marks the beginning: MortgageOne of Standard Chartered

Feature:

~ Customers can save more on mortgage interest payments

Those mortgage plans will be more suitable for people in the future

End of the presentation

Thank you for your attention.

evolution and development of mortgage services provided by banks

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