Things to Consider When Buying a Property with Parental Help
Careful consideration of mortgage affordability and application limits is crucial
In Hong Kong's sizzling real estate market, many young people cannot afford to purchase their own homes. As a result, some turn to buying property with their parents' help. While parents may be able to provide the down payment, they may encounter issues with mortgage affordability and application. Therefore, here are several points to consider when purchasing property with parental assistance.
First, the income gap between parents and children. Mortgage terms are usually calculated based on the borrower's income and property age, with banks typically using the lower of the two to determine the mortgage term. The term generally does not exceed 30 years. Children who buy property with their parents' help may not have the same financial capability as their parents, so the bank may use the parents' income and age to calculate the mortgage term. For instance, if parents who are 55 years old buy a new property for their children, the mortgage term could be shortened to 20 years based on the age difference, resulting in higher monthly payments. Therefore, parents should consider whether their children will have sufficient financial capacity to afford the mortgage in the future.
Second, the issue of high loan-to-value ratios (LTV). If children are only part-time workers or university students, they may not have a stable or desirable income, and their MPF and tax documents may not be complete. In such cases, mortgage insurance companies may struggle to demonstrate that children have the ability to repay the loan. Moreover, if parents act as guarantors while the property is under the child's name, whether it is for residential or rental purposes can affect the application for a high LTV. Thus, parents should carefully consider whether to help their children apply for a high LTV.
Third, refinancing may reduce the mortgage ratio. Some parents may borrow against their own property to increase their children's property purchase budget. While this method may be effective, it also comes with risks. If parents act as guarantors, the bank may reduce the mortgage ratio and increase the stress test. If the child's financial ability cannot afford the monthly payment, mortgage insurance companies may refuse to provide insurance. Therefore, it is important to handle the issue of additional borrowing and mortgage ratio carefully to avoid unnecessary burden and risks.
Fourth, be aware of interest rate risks. While relying on parents to buy property may reduce the burden on their children, there is also an interest rate risk to consider. Mortgage interest rates in Hong Kong have been steadily rising, and many mortgage holders have received notices of increased repayments from their banks. If interest rates continue to rise, monthly payments will increase, and it is important to consider whether children can afford the higher repayment burden. This is a problem that parents and children should consider together.
Fifth, understand the property market. Before purchasing a property, it is important to carefully research the market, especially the location and surrounding development projects. If the property is located in an area with potential for future development, its value may increase, and vice versa. Additionally, the property market is constantly fluctuating, and children should be mentally prepared for the possibility of negative equity when property prices fall. With loan periods lasting for decades, this is also something that children and parents should consider together.
Sixth, consider the parents' future. When relying on parents to buy property, it is also important to consider their future. If parents are elderly, it is necessary to consider whether they have enough retirement income or assets to support the mortgage burden, or whether they will need their children's help to support their future living expenses, among other things.
In conclusion, relying on parents to buy property can reduce the pressure on their children, but it also comes with risks and limitations. Parents and children should consider this together, and choose the appropriate property and mortgage plan while understanding financial risks and market conditions, in order to ensure the financial security of purchasing property.