Sooner or later, almost all of us buy a home, which means sooner or later, most of us need a mortgage. As far as borrowing goes, mortgages are considered acceptable debt: Mortgage providers are prepared to lend people money at a reasonable rate, and it is usually a far cheaper way of borrowing than almost any other form of debt, because it is secured against a property.
As with all financial products, the one thing we cannot stress enough is the importance of shopping around for the best possible mortgage for your needs. Two mortgages that appear quite similar may differ vastly in interest charges of $100,000 or above.
Different types of mortgages in Hong Kong
1. Fixed-rate mortgage
Fixed rate mortgages usually last for three to five years, during which time your mortgage interest will remain the same, regardless of how the market interest rate changes. Although fixed rates are slightly higher than flexible rates, the advantage of fixed-rate mortgage plans is that you no longer have to worry about any fluctuations in base rates in the near future.
2. Flexible-rate mortgage
Flexible-rate mortgage plans are based on the “HIBOR rate (Hong Kong Interbank Offered Rate)” or “Prime rate.” The Prime rate has held steady since 2008, so your interest expense is more predictable and stable. On the contrary, HIBOR changes more often. HIBOR plans are renewed periodically (at three, six, or 12 months) during the loan’s tenure, and the interest rate will be kept the same during that specific period. Generally, the longer the interest period, the higher HIBOR will be. Under a rate-hiking environment, you could opt for a HIBOR mortgage with a cap to battle the risk of increased mortgage expenses.
3. Deposit-linked mortgage
There are mainly two types of deposit-linked mortgage. The first kind is linked to a deposit account that offers a preferential interest rate equivalent to the mortgage’s interest. The other doesn’t have an equivalent mortgage interest, but your deposits in the account can be used to reduce your interest in each repayment period. The interest rate of a deposit-linked mortgage is usually HIBOR-based or Prime-based. So if you have extra cash on hand, a deposit-linked mortgage might be the most direct way to lower your interest expenses!
Second Mortgage
Under the current policy of the Hong Kong Monetary Authority (HKMA), banks can only provide loans representing a maximum of 60% of the property’s value for any residential property you intend to use as your own home. So to buy a home, your down payment will need to cover the other 40%.
A second mortgage refers to a mortgage borrowed from another lender – usually financial companies or property developers – on top of the original mortgage’s remaining balance. A second mortgage’s annual percentage rate (APR) is generally 1%-2% higher than a primary mortgage, with a maximum tenure of 20 years.
Foolish tips for mortgage holders
Whatever your mortgage, think about remortgaging! Most lenders reserve their best deals for new customers, which means you can often get a better deal by remortgaging every few years. While remortgaging can take time to arrange, with rates for new mortgages up to two percentage points lower than the typical standard variable rate, remortgaging could save you thousands of dollars a year.
Overpay your mortgage each month.
If you can do so without incurring penalties, overpaying even $500 a month could save you hundred thousands of dollars in interest in the long term, and take years off the term of your mortgage, bringing forward the day when you own your home outright.
A final note on mortgages
Be a savvy mortgage shopper! Look at the APR (also known as the overall cost for comparison), how often interest is calculated (daily is better than monthly, and monthly is better than annually), how long any early repayment charges will keep you locked in for, and whether you can overpay without incurring penalties.