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.
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.
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.
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.
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
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.
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.
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.
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.
When buying a new property intended for rental, you must declare its use based on how you purchase it:
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.
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."
Owners considering converting their self-occupied property to rental can list their properties commission-free on LetsGetHome. Focused on Hong Kong's rental market, LetsGetHome aims to create a fair, reasonable, and transparent online rental platform. Owners can list their properties themselves without commissions, handling fees, or advertising costs. If you prefer to use an agent, LetsGetHome's professional real estate team can assist with viewing, negotiating, and signing leases, with successful rentals requiring only a quarter of the rent as commission, the lowest in the industry!