Mortgage Woes.

Posted by vak (37 days ago)

Wonder if someone is aware of the regulations governing conduct of banks regarding mortgages. There seems to be a v discreet yet illegal alliance between banks and appraisers. I bought a house for 5 million. Spent 1 million on rennovation. I borrowed only 50% of the purchase price at the time. The property is now valued at 11 million (by more than 4 agents) and I was considering refinancing it with a view to invest in an investment property. Guess what. Banks valuation now is 3.8 million. ABsolutely amazing. I did not realise property had gone down so much. On further discussions with other property owners it turns out that banks tend to give low values at their discretion to make you run away so they do not have to give any reasons for turning away a mortgage they do not wish to have. Why can they simply not say... NOT INTERESTED. My loan value ratio is at the moment less than 25%. All I was doing was trying to take it to maybe 40%.

At the same time they are willing to give up to 95% on certain new properties partially through the back door. SO when the market does go bust and banks have bad loans they ask for govt bailouts as in the US. I have heard of valuations of the same property vary 200 to 300% depending on the valuers. Having bought properties overseas I have never seen such high extremes in opinions of valuers. The valuers do not even visit the place. They simply do it based on last transaction in the area. SO if there was no sale of a property in your area the last ref could be a transaction of 6 years ago. I wonder if anyone else has had similar experiences. 2 flats in the same building may have diametrically opp views. One facing the sea and one facing a garbage dump. Based on the present format the valuations are the same for both.

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Posted by cookie09 (37 days ago)

are you talking about a townhouse? or an apartment?

Posted by vak (36 days ago)

Hi, I am talking about a 3 storeyed village house. Never had any defaults on the repayments so its nothing to do with credit rating as the bank did not even go that far. On the contrary a friend bought a 3.5 million home recently which was valued from 2.2 million to 5 million by various banks. The bank which undervalued my property valued my friends 3.5 million home at 5.2 million without even seeing it. I just wante to understand the rationale behind their assesments if at all there is any??

Posted by Loyd Grossman is Miss Venezuela (36 days ago)

Hi Vak. Know what you mean but it's the same everywhere for valuations between Primary and Secondary homes. They will nearly always lend for a new development (even though it is 45% above the secondary level) and there is usually a 'house bank' . When I bought a flat in YOHO Town, it was Hang Seng Bank and even now if get a valuation for a secondary flat there, Hang Seng gives a higher valuation for a YOHO Town property than HSBC (even though it is the same group). Village houses are seen as much more of a risk than highly liquid primary properties or those in well-known estates as there are harder for the bank to sell if you fail to make the mortgage payments. As usual in HK, it's easier if you go with the flow. Always buy a well-known development from a good developer and forget the lifestyle. Also, in HK the bank's risk is only 70% of the valuation or purchase price (whatever is lower) so there's not so much danger of a US-style mortgage crisis here.

Posted by punter (36 days ago)

Agents value it at 11M and you believe them? That amount may not be the current valuation but the probable selling price.

Posted by elmerthe1st (36 days ago)

valuations are normally always different to the "market value" - bank valuations don't take into account the condtion of a proeprty so they will give the same value for a proeprty with decoration that is 20 years old compared to the same property that has had 1m of renovation works. Also any outdoor space can add a lot on to an asking price, yet banks value this space at a fraction that they do inside space. Also the age of the proeprty is a big factors as buildings that start pushing 35 - 40 years old will start to have lower bank valuations as it will ebcome harder to get mortgages on these properties.

also an odd thing that i have come across is that if you are purchasing a property then they will tend to give you a higher bank value than if you already own it and are looking to refinance it....

Posted by virendra anand (36 days ago)

we also had a similar experience at the time of buying. we ended up paying the difference on the loan value ratio to top up the commercial value in comparison to the banks valuation.

Posted by spannermonkey (35 days ago)

Any property is only worth what someone is prepared to pay for it. Pure and simple.

Posted by virendra anand (35 days ago)

I agree with spannermonkey but this is exactly what the debate is about. I bought a property 5 years ago which in the banks VALUATION was 700000 below the MARKET PRICE. No reasons given. I eventually bought it by paying the extra difference besides the 30% deposit. My STAMP duty was calculated based on what I actually paid not what the BANKS VALUATION Was??? When I decided to change one variable in the Mortgage offer at the time the bank refused to change They gave me an impression that they were aware of the commercial value but were using valuation as a backdoor tool to reduce their risk by giving a 50% loan value ratio instead of the 70% they ADVERTISE on paper.

Posted by spannermonkey (35 days ago)

The market price is driven by many factors of the which the bank ignores, unless clear evidence is there to suggest the valautions need to rise - such as several previous transactions in the same building. As was stated previously, the bank does not consider internal condition of the unit in its valuation (however you can request a bank surveyor at an extra cost to bump up their valuation a tad). Hong Kong property markets are primarily seen as investment vehicles unlike most other places, so the banks tend to be conservative as a result.
Despite what people say, you can add value to a property by good quality rennovations, which improve on the original design or layout and there is a market for this - albeit small.

Posted by Fieter (34 days ago)

It is a fact that village house valuations are often half or less what the selling price is. This has mainly to do with the fact that they are not designed, quality controlled or inspected in any way by govt/architects or engineers. Aslo quite often the paperwork is a nightmare due the ridiculous rules and laws governing village houses - many cases around of people thinking or claiming they own a village house and it turns out they don't - or they don't have the right to sell it etc etc .The banks therefore are very conservative in their valuations of village houses. Nothing you can do about it.

Posted by vak (24 days ago)

thanks to all for their inputs. Just for the benefit of other readers here is the summary of our experience in case you decide to waste your time with the big banks. BEA valued the house at 3.2 million, Wing Hang bank valued it at 4.2 and CITIC at 6.5 million. None of them saw it but here it is . 100% variation in prices. We obviously went with CITIC. Fubon bank openly told us that their valuation is 50% that of the commercial value and they further give 70% of that bank value. they are willing to give 85% to 90% for new developments in hi rises of which 15% is an insurance option and 70 to 75% is directly from the bank.

Posted by punter (24 days ago)

Thanks for sharing the info.

Posted by walkup2 (23 days ago)

So sell it for 11 million then. If you think you can.
One of the problems with the international property market BTW, was property owners treating the value of their property as a dip-in ATM.
If you want to create liquidity then sell the place and buy a more liquid property asset which is more in line with bank valuations ie newer stuff.

Posted by C (23 days ago)

"One of the problems with the international property market BTW, was property owners treating the value of their property as a dip-in ATM."

I fail to see why that is a problem? Unless you are referring to subprime, and folks thinking property prices could only go up up up.

If done responsibly, there's nothing wrong with landlords looking to use the equity in their property. OP mentioned his intent was to use the refinancing funds towards another property anyways.

Posted by vak (23 days ago)

Thanks "'C"' . You hit the nail on the head. The whole purpose of my exercise was to cash in enough to pay a deposit for a second home not sell my primary home. Seems to be fairly straightforward in places like OZ. We have been v responsible on how we borrowed. My loan is only 2 million on the current property. I felt borrowing an extra 1 million on a supposedly 12 million home would be easy. It had nothing to do with what I felt was the selling value. My top up loan requirement was based on what I felt I could repay even if the market fell through the bottom like during SARS and my investment prop had ZERO return. Secondly I am locked in with a P - 2 interest rate whereas new refinance deals are at P-3. When I started looking at refinancing I was surprised at the discrepancies in the valuations done within banks. Form my needs I could v well get the top up even if the value was 4.5 million and they gave me 70% of that. All I wanted was transparency from the banks about their policies.

I remember during the 96/97 crisis lots of well to do upper middle class people were going bankrupt.. They had borrowed to the top from their 1st primary home to pay deposits on 6 other homes that were 90% financed by banks. It was like a pyramid scheme. In theory if all 6 were rented out there was a tidy profit. Things went AWOL when there were huge vacancies. Defaults on mortgages began and then it had a snowball effect. I rented a place in Saikung for 20k/month during those days. The place had been rented for 50K a month previously, on top of that , the owner spent 200K on renno and then it was vacant for 12 months. NOT all landlords are greedy but the big DADDIES in the prop business sure know how to play the game. They would rather have the place vacant for 2 years than drop 1000 on the rent of a 35000 property. I 've been a tenant in my office and home for many years to deal with all sorts. At first I did not see the logic. Then I was told its partly FACE and partly not to set a precedent that will drop rents in the area as most landlords own multiple properties. The second part makes sense.

Posted by jon_99 (22 days ago)

um...i think u guys are ignoring that banks lend for 70% of THEIR valuation....not the asking/ selling price. So, thats why they can be conversative..and value it according to their own internal requirements..and not hyped up speculation. Imagine the 39 Conduit Rd apartment going for HK70,00 psf - do you think a bank is going to say "ok, the prop is selling for 400M, we will lend up to 70% of 400M""? No way Jose. (no offence to any Jose's). But in this way, the banks recovery rate is good and is not dependent on speculators or 1-10 buyers who are willing to pay non market standard prices for prop.

Hence, when ur buying or selling props, or re-financing your prop, u hve to get alot of valuations, and keep an eye on them..cos this will affect who ur next buyer is gng to be (ie cash buyer? or will they need a mtge), or if you can actually refinance.

Also, its impt to remember vak that you didnt say who the valuation of the prop u bought was, when u 1st bought the prop. If u 1st bought a prop for HK5M, + it was a village house, the valuation I am guessing wld be abt 3-3.5M...so, 3.8M valuation now doesnt seem too bad...1M renovations does not really affect valuations, but more on the selling price for the next buyer.

There is and sounds like there is NOTHING untoward, devious, or wrong with this practice, and is actually..the norm. One thing you can do though, is try to negotiate for your valuation to be higher..or get another valuation from another bank.

good luck,

Posted by C (22 days ago)

FWIW, bank's won't be able to increase their valuations based on any renovation work you've done, so that is only worth investing in if you will be enoying it as the end-user.

Interesting point about 39 Conduit, I wonder how that spike will affect the neighborhood valuations?

I'm going to try to re-finance my flat soon, Vak's input and experience has been very helpful in this regard.

Posted by PizzaAce (22 days ago)

Renovation work = worthless to the valuation of the property.
WHY? because your choice of interior work is according to your taste. The next owner could be completely different. Therefore the bank disregards anything you have spent on the property to protect their interest.

Further, if you add Unauthorised Building Works, that may mean the bank will not lend especially if you have some dumb buyer that actually tells the bank about the existence of UBWs.

So all you are doing with spending money on renovation and UBWs is hoping some buyer has the same taste as you and that they have enough cash to buy your property even if the bank gives it a much lower valuation than the market price the buyer is willing to pay.

My golden rule is don't spend a single cent on the property unless you can get it back from increasing the rent onto a tenant.

Posted by vak (22 days ago)

Hi Jon , thanks for your perspective. you are quite right abt the Conduit road spike and I totally agree with you on that. However I feel that Bank Managers need to use sound judgement by possibly taking a middle path , at least for genuine users buying 1st homes. Its always the speculators or BIG guns who create the crisis be it USA or this region. It should not be too hard for a Banker to determine who is a speculator and who isnt. Someone who has more than 3 homes is surely a speculator. Alan Bond made a classic statement after going bust, if you owe the bank 10000 you have a problem and if you owe the bank 100 million , the bank has a problem. The banks usually get taken for a ride by the big players anyway, so all this overregulation for simple buyers is an overkill in my opinion.

As far as valuations go I feel banks go through aggressive marketing techniques in waves. 5 yrs ago it was BEA, nowadays its CITIC Ka Wah. Banks also have internal policies that are not disclosed to clients . As an example my family opened HSBC premier accounts a few years ago and discussed mortgages for Village houses. The Manager was open about it when he said that he would put us through the hoops of applications but not worth it. Even if we had 10 million in the bank they would find ways of rejecting a mortgage for even 2 million for a village house as they were not keen on the business. He said they would make such a bad offer that you yourself would never accept it. They had only approved 2 loans of that type in 12 months. The bank had a right to chose their business. But why not say it openly.

As for yr questions Jon, I bought a single floor in a vill house for about 2.o m It was valued exactly at what I payed for as the appts in the village were like hen's teeth and there was no reference for them to do valuations since last transactions in that area were 8 years old. No one was selling So no dramas there.

Subsequently I bought another floor in the block and joined them. For this floor I had to pay considerably more than the previous purchase but the banks ref valuation was based on the last transaction which was my own. So I topped up the dff. All in I paid about 5.5 incl rennovations at the time to make it a duplex. This made 2 floors that were getting 10000/month and 7000/month rental into a duplex which was turning in 40k/month. The whole idea of this forum for me was when my own bank said that a prop which I had bought for 4.5 at the time was now worth 3.6 for 2 floors if refinanced. Forget the renno cost for now anyway. I found it v hard to believe that valuation had dropped by 20% in 5 years whereas other homes in the area went up by 30%. . They could have at least agreed to what was paid for it. Maybe they wanted me to carry on paying the high interest of the past 4 years.
This was when I started doing what you have suggested in your remarks about getting multiple valuations from different banks. Citic came up with a more realistic number of 6.5 million for 2 floors. So technically I could borrow 70% of that. What I was told was that unlike other banks CITIC WANTS the villa house business. It therefore calls prop agents , besides valuers and then take a middle path of a middle value.
The typical buyers offering silly money do not need mortgages. They are generally from the mainland and want to throw 10-15 million anywhere that gives tham a 5-7 % return. An average middle class family can barely afford the 30% deposit nowadays. I certainly could not do what I did 5 years ago based on current price trends.
C , you should try some newer banks or more mainland type banks like Bank of Communictions, Bank of CHina, Citic etc. They are a lot more sympathetic and flexible.
Good luck on your refinancing.