Providers of Second Mortgages and Their Financial Risks
Characteristics of Financial Companies, Regulation by the HKMA, and Limitations of the Money Lenders Ordinance
In recent years, second mortgages, or "second charge mortgages," have become a popular topic in Hong Kong's property market. This refers to homeowners who have an existing mortgage applying for a second mortgage with a financial institution, using their property as collateral to obtain cash or for other investments. This method provides higher liquidity, and the application process for a second mortgage is relatively simple compared to other loan options. However, there are certain risks associated with this type of loan that borrowers need to carefully consider.
Firstly, the majority of providers of second mortgages are financial companies. For second mortgages offered by new developments, they are often handled by financial companies under the developers' umbrella or those partnered with developers. As financial companies are not subject to the Hong Kong Monetary Authority's (HKMA) regulations, they do not need to follow the HKMA's counter-cyclical measures, such as loan-to-value ratios, debt servicing ratio tests, and stress tests. This explains why some lending schemes such as "Breathing Plans" or "Half-Breathing Plans" have emerged in recent years. However, although financial companies are not regulated by the HKMA, they still need to comply with the Money Lenders Ordinance.
Secondly, financial companies are subject to the Money Lenders Ordinance, which is primarily enforced by the "licensing court," the police, and the Money Lenders Registry. According to the ordinance, lending at an annual interest rate exceeding 60% is a criminal offense, and transactions involving an annual interest rate exceeding 48% will be presumed to be extortionate on the face of the transaction if taken to court for recovery. These restrictions have some degree of constraint on financial companies' lending activities and make lending schemes more stable.
Lastly, although financial companies' regulation is relatively loose compared to banks, borrowers still need to carefully consider the risks involved. Financial companies' loan interest rates are often higher, and the loan-to-value ratios are also higher, resulting in higher interest burdens during repayment. If borrowers fail to repay on time, financial companies may take more stringent measures, such as forced auctioning of the collateral, to recover the outstanding loan. Borrowers need to assess their financial situation and repayment ability thoroughly before applying for a loan to avoid financial risks.
In conclusion, second mortgages offer a quick and easy loan option, but they also come with certain risks. Borrowers need to carefully evaluate their financial situation and repayment ability, choose a suitable loan scheme and provider, and fully understand the relevant laws and regulations and loan terms before applying for a loan to avoid unnecessary financial risks.