Applying for a Mortgage? Understand These Two Things to Avoid Pitfalls

Guarantor Limited to Relatives, Stress Test and Loan-to-Value Ratio to be Lowered

When purchasing a property in Hong Kong, most people choose to apply for a mortgage loan to pay off the house price in installments. However, there are many restrictions and regulations to consider when applying for a mortgage, including the limitation of relatives as guarantors and the need to lower the stress test and loan-to-value ratio. This article will provide detailed explanations of these two things to help readers understand the precautions when applying for a mortgage loan and avoid falling into a loan trap.

The first thing: Only Relatives can be Guarantors

When applying for a mortgage loan, banks require borrowers to provide "guarantors" to increase the credit risk of the loan and reduce the risk of default. However, not everyone can become a "guarantor." Generally, banks only accept close relatives as "guarantors," including parents, siblings, and so on. Some banks may be more lenient and accept friends as "guarantors." But it is worth noting that if the loan involves "mortgage insurance," Hong Kong Mortgage Corporation has regulations that only accept "guarantors" with a family relationship with the borrower.

In addition, some people are also worried about whether the guarantor needs to live together. Actually, whether the guarantor needs to live together depends mainly on the total income and debt, not on the loan-to-value ratio. If the borrower's total income is greater than the total debt, the guarantor does not need to live together. Conversely, if the total debt is greater than the income, the guarantor must live together.

The second thing: Stress Test and Loan-to-Value Ratio to be Lowered

When purchasing a new property with the help of a "guarantor," if the "guarantor" already has a mortgage loan, the situation is similar to owning a "second home." Banks will be more rigorous when approving the mortgage loan, including lowering the "loan-to-value ratio" by one percentage point. This means that even if the borrower has a "guarantor" to help, the loan amount for the mortgage loan application will still be affected. For example, if the property price is HKD 8 million, the buyer can generally take out a loan of up to 60% of the value without applying for mortgage insurance, which is HKD 4.8 million (HKD 8 million x 60% = HKD 4.8 million). However, with the assistance of a guarantor, the buyer can only take out a loan of up to 50%, which is now only HKD 4 million (HKD 8 million x 50% = HKD 4 million).

In addition, when calculating the "debt-to-income ratio" and "stress test," banks are particularly strict and need to lower them by one percentage point, to 40% and 50%, respectively. This means that even if the borrower has a "guarantor" to help, the ability to repay the loan will still be limited. It should be noted that if both the guarantor and the mortgage applicant do not have a mortgage loan, the debt-to-income ratio and stress test do not need to be lowered by one percentage point, and the calculation method of 50% and 60% will still be used, respectively.

In summary, applying for a mortgage loan is a major decision that requires careful consideration of various factors. Among them, the limitation of relatives as guarantors, the need to lower the stress test and loan-to-value ratio, and other issues require special attention. If these regulations are not understood, it can increase one's own risk of falling into a loan trap. Therefore, when applying for a mortgage loan, it is essential to understand the relevant regulations and choose a reputable bank or lending institution to reduce risks.

In conclusion, when applying for a mortgage loan, it is important to be aware of the limitations and regulations, such as the restrictions on guarantors and the need to lower the stress test and loan-to-value ratio. By understanding these precautions, borrowers can make informed decisions and avoid falling into potential loan traps.