Credit Assessment

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Monograph:Mortgages

(7) Credit Assessment

Banks in Hong Kong are regulated by the Hong Kong Monetary Authority (HKMA), which aims at ensuring the stability and smooth operation of the banking system. HKMA is concerned that each bank should have an appropriate system of risk management and requires banks in Hong Kong to collect and give careful consideration to all relevant information on every loan application.

To perform credit assessment, a bank will follow its approval procedure which involves an analysis of the mortgagor's and any related party's (such as the guarantor's) financial position and background, the purpose of the loan and the value of the property being mortgaged.

Banks are required to consider the borrower's integrity and employment aspects. If the borrower is a corporate entity, the bank should inquire into its authority to borrow, its business expertise, the viability of its business and its management capability. The bank should also consider the prospects of the industry in which the borrower is engaged.

Banks may also consider the following when assessing the credit risk of any mortgage loan:

	a.	Loan-to-value ratio This refers to the percentage of the loan to the value of the property (which is usually the lower of the purchase price or the valuation of the property) by reference to which the bank will set the maximum amount of the loan. Previous sections have discussed the different loan-to-value ratios that banks may apply to different types of properties.

	b.	The sum of property age and loan tenor This reflects the sufficiency of the value of the property as security of the loan. Where a property has become too old and the loan secured thereon has not yet been fully repaid, the value of the property may be insufficient to secure the outstanding loan. In respect of residential properties, banks in Hong Kong usually require the sum of property age and loan tenor not to exceed 40 years or 50 years. Some banks may require the age of the property not to exceed a certain limit, for example, 30 years.

	c.	The sum of age of borrower and loan tenor This reflects the ability of the borrower to repay the whole mortgage loan. When a borrower gets old, his earning capacity will diminish and if the loan is not yet fully repaid, the risk of loan default will increase. Therefore, some banks set certain limits, such as 65 years, as the maximum sum of the age of the borrower and the loan tenor.

	d.	Debt-to-income ratio This reflects the ability of the borrower to pay the repayment instalments. The bank will usually require each monthly instalment not to exceed a percentage (for example, 40%) of the monthly income of the borrower.

	e.	Borrower's background This involves information such as the borrower's credit history, present employment or business and future earning prospects, and relationship with the bank.

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