GE1202

Managing Your
Personal Finance
Lecture 5
Purchasing Homes
HK Property Market
Average Prices for Private Domestic Housing in 40 - 69.9 m2
• In 1997, many 160 000

homeowners in Hong Kong 140 000

had negative equity

120 000
• Outstanding value of
mortgage > the current value 100 000

of home
80 000

• Home foreclosures 60 000

• The process whereby lenders

40 000
attempt to recover loan
balances from borrowers who 20 000
have quit making payments
by forcing the sale of the 0
8 6 87 88 89 90 9 1 92 9 3 94 9 5 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1 1 12 1 3 14 15
home pledged as collateral 19 1 9 19 1 9 1 9 19 1 9 19 19 19 19 19 19 19 20 20 20 2 0 20 2 0 2 0 2 0 2 0 2 0 2 0 20 20 20 20 20

HK Island Kowloon NT
HK Property Market
• The property price went down
to the bottom in 2003 and Mortgage rate
rebounded quickly
• The long lasting low interest
rate environment fuelled the
property market, leading to a
rocket rise since 2009.
Should You Buy Your Home?
• Opportunity costs of homeownership
• Closing Costs
• Interest Charged on Mortgage Payments
• Taxes
• Insurance
• Fire insurance
• Homeowner’s insurance

• Maintenance
• Lost of interest on Down Payment and Closing Costs
Closing Costs
• Closing costs are all expenses that borrowers ordinarily pay when a
mortgage loan is closed and they receive title to the purchased property
• Loan application and loan origination fees paid to the lender
• Mortgage points
• Insurance fees
• Appraisal fees
• Title check
• The research of legal documents and courthouse record to verify the seller conveying title actually
has the legal interest he or she claims and that the title is free of all liens and encumbrances
• Attorneys’ fees
• and other miscellaneous fees
• Property agent commission – 1% of the property price
Interest Charged on Mortgage Payments
• Most of the people purchase their properties that make use of the
mortgage services from the bank
• Mortgage loan is secured on the borrower's property
• According to the guideline issued by the Hong Kong Monetary Authority,
banks have to comply with a 60% loan-to-value (LTV) requirement on
owner-occupied residential mortgage lending for properties valued
below HK$7 million
• A down payment 40% of the full purchase price
Interest Charged on Mortgage Payments
• There are two types of mortgage
1. Fixed-Rate, Fixed Repayment Mortgage
• Conventional
• Both the rate of interest and the monthly mortgage payment are fixed over the full term of
the loan
• 20-year, 25-year and 30-year

2. Adjusted-Rate Mortgage (ARM)

• During the life of the loan the interest rate varies
• Two commonly used ARM in Hong Kong
• Prime-based Mortgage
• HIBOR-based Mortgage
Interest Charged on Mortgage Payments
• Prime-based Mortgage
• Prime rate
• A reference interest rate used by banks lending to customers with good credit
• There are two Prime rate in HK
• Big P: 5.25% (CITI Bank, Standard Charatered Bank)
• Small P: 5% (HSBC, Hang Seng Bank, Bank of China)

• Mortgage rate = Prime rate – spread

• eg: 5.25% - 3.1% = 2.15%
• The interest rate is relatively stable
• Interest rate change when banks adjust the prime rate
Interest Charged on Mortgage Payments
• HIBOR-based Mortgage
• Hong Kong Inter-Bank Offer Rate (HIBOR)
• It is the annualized rate charged for inter-bank lending on Hong Kong Dollar
• The cost of banks for acquiring short term funding 

• Mortgage rate = One month HIBOR + spread

• eg: 0.2% + 1.5 % = 1.7%
• This is much more fluctuated
• As Hibor rate is easily affected by the domestic capital flow and the external economical
factors, the installments of borrower may vary accordingly.
• Most of the banks will set a cap to lock up the risk of interest soar
Interest Charged on Mortgage Payments
• How to find the interest charges on the loan?
• Mortgage payment is made up partly of principal repayment on the loan
and partly of interest charges on the loan.
• Amortization table is an method to identify how much of your
repayment is used to repay the principal of the loan
• Amortization is the paying off of debt with a fixed repayment schedule in regular
installments over a period of time 

• Example
• The property worth 3m and applied a 70% mortgage loan with 15 years. Assume
prime rate = 5% and does not change in the whole period
Interest Charged on Mortgage Payments
• Step 1: Find the monthly payment
 

• L = 3m x 70% = 2.1m
• r = 3%/12 = 0.25%
• n = 15 x 12 = 180 months
• P = $14502.2 per month
Interest Charged on Mortgage Payments
• Step 2: Calculate your interest part for the 1st month
• 2.1m x 0.25% = $5250

• Step 3: Repayment – interest part for the 1st month = principal

repayment for the 1st month
• $14502.2 - $5250 =$9252.2

• Step 4: Your beginning outstanding balance – your principal repayment

= Your ending outstanding balance.
• $2,100,000 - $9252.2 = $2,090,747,8

• Step 5 repeat the step 2-4 for the subsequent month

Interest Charged on Mortgage Payments

Month Monthly Principal

Interest part Ending
Month Beginning payment (C) repayment balance
balance (A) (B) (D)

Equal to Compute
　 pervious ending with the Equal to Equal to Equal to
balance equation (A) X r (B) – (C) (A) – (D)

1 2100000 14502.21 5250 9252.2 2090747.79

2 2090747.79 14502.21 5226.87 9275.3 2081472.45
3 2081472.449 14502.21 5203.68 9298.5 2072173.92
4 2072173.921 14502.21 5180.43 9321.8 2062852.15
Interest Charged on Mortgage Payments
• Mortgage Insurance Programme (MIP)
• Government financing programme

• As long as an application meets the relevant eligibility criteria (e.g. the

maximum property value and the maximum loan amount, etc.), the bank
can provide a mortgage loan of up to 80% LTV ratio under the MIP
• Lower down payment than conventional
• 20% down payment
Interest Charged on Mortgage Payments
Interest Charged on Mortgage Payments
Taxes
• With effect from 23
February 2013,
unless specifically
exempted or
otherwise provided,
stamp duty on sale
or transfer of
immovable property
in Hong Kong is
chargeable with ad
valorem stamp duty
(AVD) at higher rates
Taxes
• The liability to Special Stamp Duty (SSD) will arise if all of the following 3
conditions are met:
I. The transaction involves the sale and purchase or transfer of a residential property
II. The property is acquired by the seller or transferor on or after 20 November 2010; and
III. The property is disposed of (which includes a resale or transfer) by the seller or
transferor within 24 months (if the property was acquired between 20 November 2010
and 26 October 2012) or 36 months (if the property was acquired on or after 27
October 2012) from the date of acquisition

• If the property was acquired on or after 27 October 2012

I. 20% if the property has been held for six months or less
II. 15% if the property has been held for more than six months but for 12 months or less;
and
III. 10% if the property has been held for more than 12 months but for 36 months or less
Alternative – Renting
• Advantages of renting
• Easier to move
• Fewer maintenance and repair responsibilities
• Lower initial costs

• Disadvantages of renting
• No tax benefits
• Limitations regarding remodeling
• Restrictions regarding pets and other activities
• Legal concerns of a lease
• Costs including a security deposit, utilities and renter’s insurance
• Not a permanent residence
The Rental Contract (Lease Agreement)
• When you rent an apartment, duplex, house, or any other type of residence, you’ll be
required to sign a rental contract or lease agreement
• Contract Protects
• Lessor/Landlord = Owner
• Lessee/Tenant = One who leases

• Contract Specifies
• Monthly rent and due date
• Penalties for late payment
• Length of lease agreement
• Deposit requirement
• Renewal options
• Amount of security deposit
• The right to sublet the unit
Buy? Rent?
• To choose the lowest-cost
alternative, compare the cost
of renting with the cost of
buying
• Use different assumptions
• Rent increases
• Mortgage rates
• Home appreciation rates
• The rate of return that you can
earn on the funds you could invest

• Need to consider non-

monetary items
Should You Buy Your Home?
• Benefits of Home Ownership
• Financial benefits
• Deduct property taxes and mortgage interest
• Potential increase in value of your home
• Building equity in your home

• Psychological reward
• Pride of ownership, feeling of permanence and sense of stability
• Lifestyle flexibility
• Privacy
• The desire to personalize your home,

• Stability
Home Affordability
• How large a monthly mortgage payment can you afford?
• Traditional financial guidelines suggest
• Spend no more than 25-33% of take-home pay on housing

• Mortgage Calculator
• http://www.gohome.com.hk/mortgage-calculator/en/

• Stress Testing
• Banks must assume a mortgage rate increased of 300 basis points (3%) in stress-
testing mortgage applicants’ repayment ability
Home Buying Process
1. Evaluate your homeownership needs
• Be rational when make a decision
• Benefit > Cost

2. Find a property to purchase

• Selecting a Location
• Be aware of zoning laws
• The regulation of the use of real property by government, restricts particular territory to residential,
commercial, industrial, or other uses
• Assess the school system if you have children.
• Using a real estate agent
• They present your offer, negotiate the price, assist you in obtaining financing, and represent you at
the closing
• Conduct a home inspection or hire an inspector
• Mortgage company may want an appraisal
Home Buying Process
3. Pricing the property
• Determine the home price
• Price is affected by whether it is a seller’s or a buyer’s market
• Property valuation by mortgage firms
• Upper limit = 5% higher than the estimated value
• Calculate the costs
• Determine the amount of the down payment
• 30% down payment
• Investigate the rates, types, & terms of mortgages
Home Buying Process
4. Negotiating the Purchase Price
• Counteroffers are common
• Earnest money
• Contingency clauses
• Buyer must be able to obtain financing
• Sale contingent on the sale of the buyer’s current home

5. Obtain financing
• Apply for a mortgage and evaluate types of mortgages.
• Qualifying for a mortgage
• Includes your income, debts, credit history, down payment amount, length of the loan, and current
mortgage rates
• Guarantor
Home Buying Process
6. Closing the transaction
• Documents signed; meeting of buyer, seller, and lender
• Closing costs include:
• Title check
• The research of legal documents and courthouse record to verify the seller conveying title
actually has the legal interest he or she claims and that the title is free of all liens and
encumbrances
• Attorney’s and appraisers fees
• Property survey
• Stamp duty
• Real estate commission
How To Acquire a Mortgage
• There are in general Five steps to apply mortgage
1. Complete the application form and enclose the relevant documents
2. The bank will then arrange for a valuation of the property and
determine the maximum loan amount based on the appraised
property value and your repayment ability
3. Upon loan approval, the bank will:
• Arrange for you to sign the Letter of Offer
• Notify the solicitor(s) to prepare the legal charge
How To Acquire a Mortgage
4. After all legal documents have been signed, the solicitor will notify the
bank to disburse the mortgage amount to the seller via the solicitor
and the transaction is then completed.
5. Finally, the bank will send you a schedule of monthly mortgage
repayment, detailing the principal and interest to be repaid and the
outstanding balance of each month
Sources of Mortgage Loans
• Retail Bank
• Mortgage broker
• A firm that solicits borrowers, originates primarily conventional loans, and
places them with mortgage lenders, the broker merely takes loan
applications and then finds lenders willing to grant the mortgage loans
under the desired terms.
• http://mreferral.com/index.php
Mortgage Selection
• When you see this situation in two banks
• BANK A “prime – 2.8%”
• BANK B “prime – 2.65%”

• Is bank A more preferable?

• There are some terms we need to consider
• Mortgage amount
• Cash reimbursement
• Interest penalty period
When To Buy Your First Home?
• The timing of when to buy a first home depends on your
• Current and expected income and expenses
• Reliable income
• Ability to make at least 10% down payment and to cover closing costs
• Ability to finance home-maintenance and improvement projects
• Adequate savings and a cash reserve sufficient to handle the loss of your job or another
financial challenge for at least a few months
• Credit history
• Future plans
• The desire to build equity and to be eligible for homeowner tax breaks and credits
• Your preferred lifestyle
• A plan to stay in your home for a least a few years
Effective Home-Buying Strategies
• Don’t wipe out your savings
• Pick the right neighborhood
• Stay away from the most expensive home in the neighborhood
• Interview your agent and ask hard questions
• Rely on professional advice
• Use traditional financing
• Don’t change the financial picture before closing
• Be sure to do the home inspection
• Be careful about taking on additional debt after closing