Batgung

I've just re-mortaged our flat, so while it's fresh in my mind here are some points to watch for. If this will be your first mortgage in Hong Kong, keep reading. If you already have a mortgage but it is over three years old, skip to the re-mortgaging section to make sure you're not missing out on some big savings.

Hong Kong mortgage - the basics

Before you visit any bank, you should decide which type of mortgage you want - a straight loan, or a loan with a linked savings account.

Straight Loan

This works the same way as any other loan: the bank lends you the money you'll need to buy the property, then you pay them back each month until the loan has been repaid. They make their money by charging you interest, so you'll be looking for the bank that offers a low interest rate.

When Banks quote you an interest rate, they'll refer to their 'Prime Lending Rate', often referred to as 'Prime' or just 'P'.  Be careful though. Here's a trick question - currently Hang Seng are quoting the interest rate 'Prime minus 2.9%' (P-2.9%), and Standard Chartered are quoting P-3%. Which is better?

Since 2005, banks have been able to set their own value for P, instead of following a Hong Kong-wide standard. So when comparing different banks' offers, always use actual interest rates instead of the 'P-X%' figures.

You'll also find that several banks quote an interest rate based on HIBOR (Hong Kong Interbank Offered Rate). It's not clear that over the long term they will work out any cheaper than mortgages based on prime, so I ignored the HIBOR option.

Loan with a linked savings account

A few banks (eg Standard Chartered, Hang Seng) also offer this type of mortgage. You get a worse interest rate than with the straight loan. BUT, you also get a special savings account that pays interest at the same rate the bank charges you on the mortgage. This is several percent higher than the usual interest you'd get on a savings account.

You don't have to keep much cash in your account for this to make a real difference. eg if you have a $1,000,000 mortgage, and on average you have $100,000 in your savings account, then using Hang Seng's current figures we get:

So most people will save money by choosing a loan with a linked savings account, instead of a straight loan.

A couple of points to note. First, with most banks the higher interest rate only applies on up to 50% of the mortgaged amount. So in the example above, you'd get 5% interest on up to $500,000 in your savings account.

Second, some banks handle the interest payments separately, while some combine them. eg with a bank that keeps them separate, your monthly statement would show a payment of $4,166, and separately a credit for the $417 interest. For the bank that combines them, the statement would only show a $3,749 payment. If you work for a company that gives assistance on morgage payments you want the payment to look as big as possible, so make sure you choose a bank that handles the payments separately.

Other options

Once you've decided which type of mortgage to choose, you'll need to get quotes from several banks. The three main figures they will quote are the interest rate, the cash rebate, and the early repayment penalty.

• Interest rate: Usually quoted as "P-something%", remember to convert it to the actual percentage before comparing different banks.
• Cash rebate: Currently you can expect to receive cash worth around 0.5-0.8% of the loan amount. It's enough to cover legal expenses, and pay you a few thousand dollars.
• Early repayment penalty. The standard quote is "3-2-1", which means that if you repay the mortgage in the first year (eg because you've sold and are moving to another flat) the bank will charge you 3% of the outstanding loan amount as a penalty. Repay in the second year and you'll be charged 2%, or 1% in the third year. After that there is no penalty.

There is some wiggle-room in these figures, eg the bank will usually allow you to make one figure better (a larger cash rebate?) as long as they can make another worse (a higher interest rate?).

Choose the offer that best meets your needs, remembering that it might not be the bank with the lowest interest rate. eg if you think there is a good chance you'd move within two years, a good choice could be a bank that offers an annual interest rate that is say 0.2% higher than the best rate, but only has a penalty for repayments made in the first year of the loan.

You may also be offered a choice of paying monthly (eg $16,000 a month) or fortnightly (eg $8,000 a fortnight). The bank's example shows how paying fortnightly lets you pay back all the mortgage loan several years earlier than paying monthly. You'll also get hear the explanation that paying more often means there is less interest to pay. That's part of the reason, but the main reason is that making 26 fortnightly payments is like making 13 monthly payments. If you're paying an extra month each year, of course you will pay off the mortgage faster. Which is better? I've always gone with monthly payments, but there's no great difference between them.

Re-mortgage?

Even if you've already got a mortgage, it's still worth checking from time to time to see if it's worth re-mortgaging. You could get a better interest rate, and / or take out some cash.

Better interest rates 

Let's look at interest rates first. Here's a list of the changing interest rates we've paid on mortgages in Hong Kong over the last ten years:

If we still had that 1998 mortgage, we'd be paying 3.75% more than we need to. On a $1M mortgage, that works out to $37,500 a year!

If you decide to re-mortgage, you could use it as a chance to change banks, but it's often easier to stay with your current bank. First check around to see what good offers are available from other banks. Then take the best of those to your bank and tell them you'll switch unless they make an improvement - you'll typically get offered a better rate, and just need to sign their letter to accept.

Note your bank will be less willing to give you a good offer if your mortgage is still in the 'early repayment penalty' period. They know that if you do switch to another bank, you'll still have to pay your current bank a penalty.

Take cash out of your mortgage 

If the value of your property rises, you've got the chance to take out a new, larger mortgage. After paying off the old mortgage, you pocket the difference as cash. Just as in the example above, you can either switch to another bank for a new mortgage, or ask your current bank to increase the size of your existing mortgage.

If you need a loan, this is one way to get cash at a relatively low interest rate.

We've re-mortgaged for both the reasons given above - to get a better interest rate, and to take some cash out. We'll invest the cash straight back into a couple of unloved local shares that are paying good dividends. The dividends will more than cover the monthly interest payments, so the hope is that the value of the shares will increase, then after several years we can pay back the loan and pocket a profit. Sounds good in theory!

Any other helpful points to share about mortgages?

MrB