Mortgage basics: how the loan-to-value ratio, rate, term and repayment work
A mortgage has four basic figures: the loan-to-value ratio, the interest rate, the repayment term and the monthly repayment. Understanding how they relate, and how HIBOR-based and prime-based mortgages differ, lets you see the real cost when you compare banks' plans.
The loan-to-value ratio sets the down payment
The loan-to-value ratio is the loan as a percentage of the property's value. The higher the ratio, the smaller the down payment, but the monthly repayment and the total interest both rise. The bank bases the loan on the lower of the purchase price and its valuation. When the valuation is below the price, the buyer must make up the difference in cash.
The maximum loan-to-value ratio is set by the Hong Kong Monetary Authority's supervisory requirements and the terms of the Mortgage Insurance Programme, and changes with policy. Ask a bank about the current arrangements before you apply.
HIBOR-based and prime-based mortgages
The rate on a HIBOR-based mortgage is the Hong Kong Interbank Offered Rate (HIBOR) plus a percentage. It moves with HIBOR each month and usually has a capped rate. The rate on a prime-based mortgage is the bank's prime rate less a percentage. It changes only when the bank changes its prime rate.
| Item | HIBOR-based mortgage | Prime-based mortgage |
|---|---|---|
| Rate basis | HIBOR | Prime rate |
| How often it changes | Moves with HIBOR | When the bank changes its prime rate |
| Rate ceiling | Usually has a capped rate | Calculated from the prime rate |
Term and monthly repayment
The longer the term, the lower the monthly repayment, but the more interest you pay over the whole term. Most mortgages are repaid in level instalments: every instalment is the same, with interest taking a larger share at first and principal a growing share later.
When you compare plans, look beyond the rate at terms such as the cash rebate, the penalty period and a high-interest deposit account. Repaying early, refinancing or selling the property within the penalty period usually means paying a penalty or returning the rebate.
What does the bank look at when it assesses an application?
The bank reviews your proof of income, credit record and existing debts, and works out your debt servicing ratio. For the property, it considers the valuation, the age of the building and the type of property. Older buildings, village houses and some unusual properties may get a lower loan-to-value ratio or a shorter term.
- Prepare your payslips, tax demand notes and bank statements for the last few months.
- Ask one or two banks for a valuation before you sign the provisional agreement.
- Repayments on credit cards and personal loans count towards the debt servicing ratio.
Common questions
Which is better, a HIBOR-based or a prime-based mortgage?
Neither is always better. The rate on a HIBOR-based mortgage moves with HIBOR: it is cheaper when HIBOR is low, and the capped rate limits how high it can go. The rate on a prime-based mortgage is more stable. Compare the actual rate at the time, the capped rate and the other terms before you choose.
What if the bank's valuation is below the purchase price?
The bank bases the loan on the lower of the purchase price and the valuation, and the buyer must make up the difference in cash. You can ask several banks for a valuation, and find out the likely valuation before you sign the provisional agreement.
What is the longest repayment term?
The maximum term is set by the bank according to the borrower's age, the age of the building and regulatory requirements. Practice differs between banks, so ask the bank directly before you apply.