HK Mortgage: Loan to Value Ratio for Self-Occupied or Rental

In 2024, Hong Kong raised the mortgage ratio for non-self-occupied residential properties to 60% and eliminated the stress test requirement, prompting an increasing interest in purchasing properties for rental income. Mortgage applications for rental properties are more complex than those for self-occupied properties, especially concerning mortgage ratios and declarations of intended use. This article explores the key requirements for Hong Kong rental mortgages, whether you're buying a new property for rental or converting a self-occupied property to a rental.

Hong Kong Mortgage Ratio

The mortgage ratio refers to the percentage of the property's value that the bank is willing to lend. Starting February 28, 2024, the Hong Kong Monetary Authority suspended stress testing requirements, adjusting the mortgage ratio for declared rental properties from 50% to 60%. This means owners can secure a 60% bank mortgage whether purchasing a property for rental or converting a self-occupied property to a rental use.

What is the Meaning of Loan to Value Ratio?

The loan to value ratio (LTV) is a critical financial term used by banks to assess the risk associated with lending against the value of a property. It is calculated by dividing the mortgage amount by the property’s appraised value or purchase price, whichever is lower, and is expressed as a percentage. This ratio helps lenders determine the level of exposure to risk they face before approving a mortgage. For example, a higher LTV ratio indicates a higher risk, as it means the borrower is taking on more debt relative to the value of the property.

Loan to Value Ratio Examples:

• Self-occupied properties: For properties valued under HK$30 million, the maximum mortgage ratio is 70%.
• Self-occupied properties: For properties valued over HK$35 million, the maximum mortgage ratio is 60%.
• Rental properties: Regardless of the property's value, the maximum mortgage ratio is capped at 60%.
• Secondary rental properties: If the first property's mortgage is not fully paid off, the highest mortgage ratio is 40%.

What is a Good Loan to Value Ratio?

A good loan to value ratio typically varies depending on the type of property and its use, but generally, a lower LTV is considered better as it indicates less risk for the lender. In Hong Kong, a good LTV ratio for self-occupied properties can be as high as 70%, whereas for rental properties, a good LTV ratio is often capped at 60%. This lower ratio for rental properties reflects the increased risk associated with rental income and potential vacancies. Maintaining a good LTV ratio not only facilitates easier loan approvals but also can result in more favorable mortgage terms, including lower interest rates.

What is a High-Ratio Mortgage?

High-ratio mortgages are typically granted to self-occupied property applicants, where banks approve loans ranging from 60% to 90% of the property value. For rental properties, the mortgage ratio generally does not exceed 60% due to higher risks, and mortgage insurance companies require the property to be self-occupied to apply for high-ratio mortgages.

Hong Kong's 80% LTV ratio Mortgage Requirements

1. Must be first-time buyers:
   • Applicants must be buying a residential property in Hong Kong for the first time.
2. Income Requirements:
   • Applicants must be salaried employees with primary income from Hong Kong. If the salary mainly consists of commissions or cash with insufficient base salary, the maximum mortgage ratio might be reduced to 80%.
   • Non-permanent residents of Hong Kong or residents with overseas income must demonstrate a strong connection to Hong Kong, such as local employment or having immediate family living in Hong Kong.
3. Mortgage payment to income ratio:
   • Payments must not exceed 50% of the applicant's or household's income, including fixed benefits like annual bonuses or double pay, if declared in the employment contract and reported for taxation.
4. Stress test requirements:
   • Although the Monetary Authority suspended the stress test requirement in February 2024, applications for 80% mortgages still undergo stress testing to assess the need for additional mortgage insurance premiums, not for adjusting the mortgage ratio.

What is Mortgage Insurance?

High-ratio mortgages typically require the purchase of mortgage insurance to protect lending institutions from the risk of borrower default. If the borrower fails to repay the loan, the insurance company will pay a certain percentage of the loan amount. The Hong Kong Special Administrative Region government offers a high-ratio mortgage insurance program through the Hong Kong Mortgage Corporation (HKMC), allowing first-time homebuyers to enter the market with a lower down payment. Under this program, buyers can apply for a mortgage ratio of up to 90%, meaning the down payment is as low as 10% of the property value.

How to Convert a Unit from Self-Occupied to Rental

If you have a high-ratio mortgage (over 70%) on a self-occupied property and want to switch its use to rental, you must first cancel the mortgage insurance since it typically mandates the property be self-occupied. After converting, you'll need to adjust the mortgage ratio to 60% or lower with your bank.

Note that banks vary on how they handle interest rates when a property switches from self-occupied to rental; some may increase rates due to the higher risk. To avoid potential rate hikes, consider switching to a bank with more favorable terms.

Mortgage Agreement and Fees

Before converting a self-occupied property to a rental, owners need to apply for a "mortgage agreement" from the mortgage bank. This document is the bank's formal approval for changing the use of the property and may involve certain fees, which vary from HK$1,000 to HK$2,000 among different banks. Additionally, the bank may require a rental assignment to be done at the Land Office, incurring extra legal fees.

Risks of Unauthorized Rentals

Owners should note that unauthorized use of the property for rental without bank approval may lead to default risks, with the bank potentially recovering the loan and imposing legal liabilities. Although the tax authorities do not disclose rental information to banks, if owners declare rental income for taxation, the tax authorities may confirm the property's actual use with the bank.

Should New Properties Be Declared as Self-Occupied or Rental?

When buying a new property intended for rental, you must declare its use based on how you purchase it:

• Consecutive Contract Purchases: Always declared for rental use.
• Immediate Transactions: You can declare the property as either self-occupied or for rental use.

Choosing Self-Occupied: This option allows a maximum mortgage ratio of 70% without needing mortgage insurance. During the period when stress tests are suspended, the maximum mortgage payment to income ratio is 50%.

Choosing Rental: The maximum mortgage ratio is 60%, and the mortgage payment to income ratio is capped at 40%. Additionally, some banks may include projected rental income in your total income calculation to help pass the stress test.

If you are undecided or cannot afford a large down payment, consider initially declaring the property as self-occupied to secure a 70% mortgage ratio. Later, if you decide to convert the property to a rental, inform the bank to adjust the mortgage ratio accordingly. If the property's value increases and the mortgage drops below 60%, you might avoid the need for mortgage insurance and any additional payments.

Tax Implications of Renting Out a Property

Owners should be aware that renting out a property affects taxation, requiring property tax payments. The property tax rate in Hong Kong is 15% of the net rental income annually, from April 1 to March 31 of the following year. For more on property tax, consider reading "Hong Kong Property Tax Guide: How Owners Can Save on Taxes."

LetsGetHome: Commission-Free Rental Platform for Owners

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