In order to avoid excessive borrowing by the public and lead to an economic crisis in the financial system of the property market, the HKMA requires banks to conduct stress tests for mortgage applicants. What exactly is a stress test? How will it affect the burden of mortgage payments? The article will guide you through the process step by step together.
How is the stress test calculated?
When the bank approves the mortgage, the biggest consideration is the income level of the mortgage applicant, because it is related to whether the loan will be bad debt. According to the guidelines of the HKMA, the mortgage applicant’s monthly mortgage installment and income ratio (DSR: Debt-Servicing Ratio) must meet the two following requirements.
1. Monthly Instalment must not exceed 50% of the income.
2. Assuming that the interest rate rises by 3%, the DSR cannot exceed 60%.
Taking first-time homebuyers as an example, their maximum DSR ratio is required to be 50%. That is, suppose that the applicant’s monthly income is $20,000, and the monthly mortgage repayment accounts for up to 50% of the income, which is $10,000.
First-time buyers will then have to pass the stress test. If the monthly repayment amount is $10,000, the loan amount is approximately equal to 2.48 mil HKD, the annual interest rate is 2.5%, and the repayment period is 30 years. Under the stress test, the annual interest rate is assumed to be 5.5%, and the monthly repayment amount will increase to approximately $14,383.92..
To understand your maximum DSR ratio, you must first ask yourself several questions: “Is the property used for self-occupation?” “Is the income from Hong Kong?” and “Are there any loans or guarantees for other mortgage properties?” Under the framework that DSR cannot exceed 60%, the monthly income requirement becomes a minimum of $23,973 instead of the original $20,000.
At the same time, it should be noted that when the bank calculates the DSR ratio, if the mortgage applicant himself has any type of personal loans, the number needs to be included in the calculation.
If you think that the above calculations are a bit complicated, you may wish to use the Mortgage Calculator with new functions to help. The Mortgage Calculator has a built-in “mortgage computer” that updates mortgage information daily, including HIBOR and P interest rates, rebate ratios, etc., It helps you to keep track of the latest mortgage rates and help you to list out your home purchase expenses.
For example, if you enter a property price of 6 mil HKD, a mortgage of 60%, a loan of 3.6 mil HKD, an annual interest rate of 2.5%, and a 30 years loan term, the monthly contribution will be about $14,224, and the monthly income requirement under the stress test is about $34067.
What if you can’t press the stress test?
Under the latest Mortgage Insurance Programme, if the mortgage applicant fails to pass the stress test, he can still apply for 80% or 90% of the mortgage, but it needs to pay additional 10% of mortgage premiums, depending on the internal guidelines of each bank. If it still fails, the applicant may seek relatives and friends to be the mortgage guarantor, to increase the repayment ability. The applicant can also reduce the property price budget before buying the property, and understand his affordability.
Finally, please mention that in addition to preparing for the first phase of the purchase, you must also reserve other expenses such as Stamp Duty, contract fee for the lawyers, house deeds or mortgage deeds, agent commissions, etc.,. Remember to calculate it before you get on the bus!