Stress testing: safeguarding financial stability for Hong Kong citizens
Reducing overborrowing and protecting borrowers' rights
With skyrocketing property prices in Hong Kong, citizens are facing increasing pressure to purchase homes, leading some to borrow excessively and ultimately fall into debt crisis. To avoid such a scenario, the government has introduced stress testing, which serves as a useful measure to ensure financial stability for borrowers, prevent overborrowing, and protect their rights.
Under stress testing, prospective homeowners are required to pass a financial health assessment before they can apply for mortgages from banks. The test aims to determine if the borrower has sufficient repayment capacity to avoid financial difficulties. During the assessment, the bank evaluates the borrower's ability to repay and the level of risk to determine their eligibility.
The stress testing requirements stipulate that the borrower's monthly mortgage payment should not exceed 50% of their income-to-debt ratio. This ratio is calculated based on the borrower's income and expenses, ensuring that they have sufficient repayment capacity. Additionally, even if interest rates increase by 3% (as required by the stress test), the mortgage payment cannot exceed 60% of the borrower's monthly income, which ensures sufficient repayment capacity in the event of financial difficulties.
It should be noted, however, that borrowers who do not meet the stress testing requirements may still be approved for up to 80.5% of the mortgage through mortgage insurance, but the final decision is still at the bank's discretion. This is because some borrowers may not meet the requirements but still have strong repayment capacity. If the bank deems them capable of repayment, they may still have the opportunity to obtain a mortgage loan.
In conclusion, stress testing is a good method for safeguarding financial stability for Hong Kong citizens. By testing repayment capacity and risk control, it helps prevent overborrowing and financial difficulties, thus protecting borrowers' rights and maintaining a stable market. Therefore, citizens applying for mortgage loans should have a clear financial plan and repayment schedule to ensure they meet the stress testing requirements and avoid falling into debt crisis.