Know your finance companies and intermediaries before offering your property as collateral for a loan
In recent years, some finance companies claim in their ads that they can offer property loans to help customers settle their high interest rate loans, restructure debts or cash out. There are also intermediaries luring property owners to pledge their properties to finance companies and apply for loans. Make sure you take heed of these advertisements because finance companies or intermediaries may charge you high interest and fees, leaving you heavily indebted, and you could even lose your pledged properties!
The Consumer Council, from time to time, has received complaints about the operations of property mortgages and refinancing businesses, as well as price disputes. Other concerned groups have also pointed out that there is an increasing number of complaints and cases seeking help for matters related to property loans of finance companies and fees charged by intermediaries.
In fact, many of us might have come across advertisements from finance companies through different channels and have been approached by people who claim to be an employee of a certain bank or a finance company via phone calls, encouraging us to borrow money through applying for various mortgage-related loans. These callers could be intermediaries. Their target customers are mostly property owners who possess private housing, Home Ownership Scheme (HOS) units, self-owned public housing units who may have debt issues or cash flow problems, and may be in need of refinancing or cash-out refinancing facilities.
Common methods on loan lobbying
Some intermediaries would use various methods to convince their target customers that if they pledge their owned properties, they could obtain a loan from a finance company within a short time with attractive terms; the loan can then be used for repaying credit card bills or other high interest rate loans. Solicitation methods may include claiming or emphasising in the advertisements that:
- owner of a HOS unit could pledge the property without paying the premium to the Housing Authority;
- there is no need to present the deed of a unit or a house as a collateral at the time of loan application;
- there is no need to present any proof of income;
- the finance company would not review the credit records of the applicant;
- a co-owned property could be pledged without notifying the other property owner(s); or
- unsuccessful application for the loan will not incur any fees.
These loans may involve high interest and intermediary fees under different names. Some loan applicants only become aware of the various fees after signing an agreement, which can result in disputes.
Borrowing by using properties as collateral may worsen indebtedness
Loan applicants who appoint an intermediary to refer their loan applications to a finance company and use their owned properties as collateral may encounter different situations during the process. These include the following scenarios:
- Intermediaries who claim they are the employees of a bank or a sizeable finance company would first indicate that low-interest loans can be arranged for the applicants. They would later point out that applicants’ credit record is relatively low, and therefore refer them to apply through other intermediary agencies. The process, eventually, involves a number of intermediaries and the applicant ends up paying the intermediary fee many times.
- In some cases, the borrower originally has the ability to repay the debts, but after the lobbying of the intermediaries, he or she decides to apply for a loan. Employees of the intermediary agency would then claim that it takes time for handling the property loan with a bank and suggest the borrower to seek loans from other finance companies such that they can settle their original debts and the intermediary’s fees as an interim / transition measure.
- The intermediaries of some cases charge a certain amount of fees for retrieving credit records, debt evaluation, solicitor referrals, etc.
- Even if a loan applicant eventually withdraws the application, he or she is still approached by the intermediary agency through debt collection agencies, solicitors or court proceedings for civil claims to recover the intermediary’s fees. The intermediaries may also apply to impose an encumbrance on the pledged property with the Land Registry.
- Some applicants who had signed an agreement to appoint a loan intermediary and paid the intermediary’s fees never received a loan from the finance company; and they could not contact the referring intermediary.
- Some property owners receive calls from people who claim to be an employee of a bank and request the borrower repay the entire sum of the mortgage loan. The caller at the same time suggests that he or she can help the owner obtain a loan at low-interest rates. The tactic is used to earn handling fees.
- Some owners of HOS units receive letters printed on letterheads that come with logos similar to those of the Hong Kong Housing Authority. However, these are warning letters sent by intermediary agencies. The letter states that the owner has taken out an illegal loan and therefore violated the Housing Ordinance, and the owner is subject to prosecution or recovering of the unit. The letter then suggests that they can offer loans for debt consolidation.
The fees involved in the complaints of loan intermediaries range from a few tens of thousands of dollars (the loan amounting to hundreds of thousands of dollars) to close to 1 million dollars (the loan amounting to a few millions of dollars). As the intermediary’s fees are very high, the total loan amount may snowball and grow quickly.
Be cautious when you arrange refinancing or cash-out refinancing loans
Before you decide on taking out a loan, you should ask yourself a number of basic questions. For example, is the loan the best option to resolve your debt problems? Can you repay these debts on your own? If you do need to take out a loan, you should:
- Compare different loan products in the market such as personal loan, over-drafting, property cash-out refinancing, etc and select the loan that best suits your personal circumstances.
- As far as practicable, apply your loan directly with authorised financial institutions regulated by the Hong Kong Monetary Authority (HKMA) (ie licensed banks, restricted licensed banks and deposit-taking companies), or reputable licensed money lenders; also approach these institutions directly yourself.
- When you select a loan, make sure you pay attention to the interest rate, and compare the annualised percentage rate (APR) of similar loan products in the market because licensed banks, restricted licensed banks and deposit-taking companies regulated by HKMA, as well as their affiliated companies and associated companies under their control, must include all charges and fees related to the provision of the loans in the calculation of the APR (excluding handling fees of overdue payments / interests and handling fees for early repayment, etc.)
- Consider other factors, such as whether the interest rate is fixed or floating, the duration for repayment, etc.
Understand the pros and cons, risks and rights when you borrow
If you can only obtain a loan by pledging your property to a finance company, you should:
- Weigh if the offer is worthwhile by reading the contract and its terms very carefully, and consider the total interest expenses and all the fees involved for obtaining the offer, rebate, etc.
- Pay attention to the details of various fees. For example, whether an administrative fee, handling fee for early repayment, handling fee for overdue repayment, and contract cancellation fee, etc will be charged.
- Evaluate any third party fees charged in addition to the intermediary’s fees, eg the fees paid to the property valuator and the solicitor, etc.
- Consider whether you can bear the risks that your property may be taken over by the finance company if you can no longer make repayments, especially when the pledged property is your home.
Points to note when seeking property loans via an intermediary
If you must enter into an agreement with an intermediary agency before you can be referred to a finance company for the loan, consider very carefully before you sign such contract the related pros and cons, the risks and the rights of obtaining the loan through an intermediary:
- If the intermediary claims to be a representative of a bank, a finance company or even a government department or a public body, do contact the relevant organisation to verify the intermediary’s identity.
- Ask the intermediary agency to list out in the contract which bank or finance company it is referring your application to, and ask the agency to provide its licence numbers, explain the procedures involved, and tell the expected approval time for the loan application.
- If the intermediary agency would charge you any fee, you should stay vigilant and request the agency to list out the amount of the intermediary’s fees, and the scope of service covered by the fees, the fee schedule, method of calculation and the repayment period, etc in the contract.
- If the loan application referral service does involve other intermediary agencies, then you should request the intermediary to list out the information of these companies and the details of their charges, if any, in the contract.
- Make sure you know whether the contract has specified if the intermediary can guarantee successful approval of such loans, the loan amount and interests; and find out whether you still have to pay the intermediary’s fees if all or part of the amount of the loan application is rejected, the approval is granted at a higher interest rate, the approval is not granted after the expected period of time or if the contract itself is terminated. If the intermediary’s fees still has to be paid, the contract should list out the payment amount under each of the above circumstances.
- Within 7 days after entering into a repayment agreement/interest payment agreement with the customer, the licensed money lender must prepare a summary/memorandum that list out all the terms of such agreement, let the customer sign personally and give the customer a hard copy of the relevant documents. Otherwise, the agreement shall not be enforced.
- An intermediary may directly deduct the intermediary’s fees from the loan amount before passing on the balance to the customer. So, you should demand that a contract term about the intermediary’s fee, including when and how it must be paid, be included. When making the payment, you must ask for all the relevant documents for record-keeping purposes and retain them well.
Seek help when necessary
All in all, if you need to apply for a loan, you must fully understand the terms of your loan, as well as your rights and obligations in the transaction. Otherwise, you should not sign any document. People who are troubled by debts should seek assistance from a professional such as an accountant or a social worker.
Even if you do not own any property, you should remind those you know, in particular senior citizens, of these matters. If they receive calls from a stranger who tries to persuade them on refinancing, or cash out from their properties, they must think carefully and discuss with people they trust.
- What are ‘property loan’, second mortgage, refinancing, and cash-out refinancing?
We should note that the term “property loan”, as often seen in advertisements of finance companies, is a general term that refers to loans related to properties. It could cover personal loans that use properties as a collateral or property mortgage loans. The very term of “property loan” may convey different meanings with different institutions.
Second mortgage: A mortgage taken out by a property owner with another institution (such as the property developer or another financial institution) for an additional loan on the same property that is already mortgaged with a bank or a financial institution.
Refinancing: A mortgage of a property, which is already taken out with a bank or a financial institution, is now offered by another institution.
Cash-out refinancing: When the unpaid balance of a mortgage loan is lower than the maximum limit the offering bank or financial institution can lend its property owner (eg the owner has purchased the property for a certain period of time and has repaid part of the loan), the property owner can apply with the same bank or finance institution to increase the amount of the loan. Before the bank approves cash-out refinancing, it would principally consider factors including repayment records and ability of the property owner, as well as the amount under application. Take an example of a first-time home buyer, the total loan amount (including the cash-out refinancing amount) is usually lower than 60% of the estimated value of the property.
For instance, a first-time buyer purchases a home for HK$6 million. Assuming the property owner repays HK$600,000 of the capital of the mortgage loan a few years after his purchase, and adding the down payment of HK$2.4 million, he still owes the bank HK$3 million. During this time, the property’s price increases to HK$6.8 million, and the property owner applies for a larger mortgage amount, the maximum sum that he can cash out is as follows:
Estimated property value x 60% - Balance of the first mortgage
= HK$6.8 million x 60% - HK$3 million
= HK$4.08 million - HK$3 million
= HK$1.08 million
At present, members of the public can review information on properties that have taken out mortgages from the Land Registry’s “Monthly Memorial Information on Mortgage Transactions”. Such information includes the mortgage amount, as well as the bank and / or finance company that is offering the mortgage.
- What should owners of subsidised housing units note when seeking cash-out refinancing?
According to the Housing Ordinance, owners of a subsidised housing unit, eg Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme, shall not sell, let, mortgage or in any way transfer or part with possession within the alienation restriction period of 5 years, or after the said period but without making the land premium payment. As such, if an intermediary agency tries to convince a potential customer to cash out and refinance with a subsidised housing unit, the owner must first understand the mortgage refinancing requirements.
- If an owner plans to arrange mortgage / cash-out refinancing with the property during the alienation restriction period or after the period but before paying the land premium, approval must first be obtained from the Director of Housing, who would set out certain conditions for the case. The property owner must comply with these conditions.
- Application would only be allowed when the owner faces financial difficulties or is in immediate need of money to settle unexpected personal or family expenses. Reasons for approval include: raising funds for medical care; education expenses for family members; expenses for funeral; payment of flat purchase price or alimony to divorced/separated spouse; failure to make ends meet due to financial difficulties in business operation. Other circumstances such as personal financial issues are considered case-by-case.
- After obtaining approval for refinancing the mortgage, the property owner must apply for refinancing with a licensed or registered bank or deposit-taking company under the Banking Ordinance.
- The owner must file with the respective District Tenancy Management Office a completed Application Form and Requisition Form, administrative fee, documentary proof with the reason(s) for application and the outstanding loan balance of the unit’s first mortgage.
Owners of subsidised housing units who are aged 50 or above and would like to settle land premium payment may consider to make use of the Premium Loan Insurance Scheme launched by the Hong Kong Mortgage Corporation Limited (HKMC). Please refer to the HKMC webpage for details.
- What are the major sources of credit in Hong Kong?
Source of credit Business nature Regulation Licensed bank Various personal credit services, including credit card, mortgage and personal loan Regulated by the Hong Kong Monetary Authority under the Banking Ordinance Restricted licensed bank Some restricted licensed banks also offer personal credit services Deposit-taking company - Most are owned by or associated with banks; principally involved in services such as personal consumption credit and securities, etc.
- They can only accept deposits worth HK$100,000 or above, and the initial deposit period must not be shorter than three months
Licensed money lender - Target customers are those who are not eligible to applying loans from a bank or a deposit-taking company due to lower credit scores or other reasons
- The interest rate may be higher than that of a bank and a deposit-taking company, but the loan approval time may be shorter, and not much emphasis may be placed onto borrowers’ credit record
- Must hold the money lender’s licence; licensing matters and money-lending transactions are subject to the regulation of the Money Lenders Ordinance
- The money lender’s name and licence number must be displayed prominently in advertisements; loan interests be calculated with defined formulae and expressed by an annual interest rate in percentage