With property prices at an all-time high, saving for a down payment is always challenging for average earners. In addition to the sky-high prices, the recent rise in interest rates also increased the cost of home ownership. In order to get on the property ladder, many first-time home buyers would enrolled the Mortgage Insurance Programme in order to maximize their loan amount. For example, when you are purchasing a HK$600 million property, with the Mortgage Insurance Programme, you can get a 90% mortgage loan, which means you only need 10% down payment. However, if your loved ones failed the bank’s mortgage stress test, and asked you to act as a guarantor – will you step back and start thinking about it seriously? It is a responsibility that should not be taken lightly.
Take the case of a married couple who wish to purchase a unit of HK$5.8 million. Technically, the husband meets the income requirement for the 90% mortgage plan. But he needs to make a HK$5,500 monthly personal loan repayments, and has racked up almost HK$100,000 of credit card debt, with records of late credit card payments, all of which are likely to have a negative impact on his credit score. If he applies for a mortgage, the bank will first deduct his existing loan repayments from his monthly income to assess his affordability. The application will also be subjected to a ‘stress test’ to determine his creditworthiness and repayment ability.
Mortgage stress test helps to determine whether a borrower can meet the monthly repayments of their mortgage and all other necessary budgeted expenditures if mortgage interest rates were to increase by a certain amount. In light of the boom in property prices in recent years, the Hong Kong Monetary Authority (HKMA) now recommends that all mortgage applicants must pass the mortgage stress test. According to the guidelines, the stress test is calculated at the current interest rate plus 3%, requiring the applicant's debt servicing ratio (DSR) to be less than 60% . In addition, when calculating the applicant’s disposable income, many banks typically deduct loan repayments (such as personal loans), where applicants could failed to meet the eligibility criteria.
If the husband wishes to purchase a property under his name, he may need his wife to become his guarantor – a solution which is becoming increasingly popular. Previously, couples would typically purchase a property together, but the government has introduced a series of market-cooling measures in recent years – such as the requirement that home owner(s) must be first-time buyers in order to qualify for a 90% mortgage – meaning that many couples now purchase a property without adding the name of their spouse. If the applicant’s income is too low or they cannot pass the bank’s stress test, their spouse would act as a guarantor.
In the aforementioned example, if the husband applies for a mortgage and the bank evaluates his maximum affordability is a property of HK$4.8 million or less, his wife must act as a guarantor for the remaining HK$ 1 million. If she acts as a guarantor for HK$ 1 million over a period of 25 years (the mortgage term must be identical to the term of the HK$ 4.8 million loan), this equates to a monthly repayment of HK$4,300. In order to pass the bank’s stress test, she must have a monthly income of at least HK$10,000 – a figure which is achievable for many people in Hong Kong. Of course, the guarantor must also be sure that the applicant will not default on his/her repayments, as this may affect the guarantor’s credit score. However, as the applicants are a married couple, the chances of this occurring would be relatively low.
Although the guarantor is only required to step in if the applicant cannot afford the repayments, she may face difficulties if she wishes to purchase a property under her name, as banks would deduct the HK$ 1 million for which she acts as a guarantor from her maximum affordability. For example, if she could originally afford a property of HK$4 million, the bank will set her maximum affordability at HK$ 3 million. Acting as a guarantor can therefore have significant repercussions – if you plan to buy a property in the future, you should be aware of the financial consequences and be sure of the borrower’s ability to repay to avoid a negative impact on your credit score.
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