{"id":8118,"date":"2024-02-29T17:38:00","date_gmt":"2024-02-29T09:38:00","guid":{"rendered":"https:\/\/www.spacious.hk\/en\/blog\/?p=8118"},"modified":"2024-03-04T16:00:24","modified_gmt":"2024-03-04T08:00:24","slug":"a-complete-guide-on-mortgage-stress-test","status":"publish","type":"post","link":"https:\/\/www.spacious.hk\/en\/blog\/a-complete-guide-on-mortgage-stress-test","title":{"rendered":"A Complete Guide to Mortgage Stress Test"},"content":{"rendered":"\n

Taking out a mortgage from a bank requires a stress test. For new buyers who have no concept of what a stress test is, look no further than this comprehensive guide.<\/p>\n\n\n\n

In this article, Spacious covers a wide range of topics including when to do a stress test ; how to calculate stress test ; mortgage difference between buying a property for self-use or rental ; whether it is feasible to avoid a stress test and much more. Read on and be a savvy mortgage borrower.<\/p>\n\n\n\n

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Jump to: When Stress Testing is Needed<\/a>\uff5cCalculating Debt-to-Income Ratio<\/a>\uff5cUpper Limits for Debt-to-Income Ratio<\/a>\uff5cStress Test Calculation Example<\/a>\uff5cFirst-time Homebuyers’ Stress Test<\/a>\uff5cFAQ<\/a><\/p>\n\n\n\n

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Latest Update: <\/strong>

– The Hong Kong Monetary Authority (HKMA) has suspended the interest rate stress testing requirement for property mortgage lending that assumes a 200-basis-point rise in the mortgage rate. (2024-2-28)

– Rental properties that are not used by owners, the maximum loan-to-value ratio will be increased to 60 per cent, from previous 50 per cent. (2024-2-28)<\/p>\n\n\n\n

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When Stress Testing is Needed<\/h2>\n\n\n\n

The amount of mortgage loan to buy a property usually involves a large sum of money. The bank will conduct an approval process to confirm that the applicant has the ability to make payments before approving the loan.<\/p>\n\n\n\n

To evaluate the applicant’s repayment ability, the bank will perform two types of calculations:<\/p>\n\n\n\n

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  1. Based on the current mortgage interest rate, the bank will calculate whether the Debt-to-Income ratio (DTI) is within the upper limit; <\/li>\n\n\n\n
  2. Assuming the current mortgage interest rate rises by 2%* (stress test scrapped since 28 February, 2024), the bank will calculate whether the DTI is within the upper limit.<\/li>\n<\/ol>\n\n\n\n
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    In Hong Kong, unless borrowing a developer’s mortgage, there are probably only two types of homebuyers who can skip the bank’s stress test:<\/p>\n\n\n\n

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    Stress Test Exemption<\/th>Conditions<\/th><\/tr><\/thead>
    First-time homebuyers who apply for a mortgage through the Mortgage Insurance Programme<\/td>High LTV (loan-to-value) applications for completed properties (stage payment required for pre-sale properties); the purchased property can only be used for self-occupancy.<\/td><\/tr>
    Eligible Green Form or White Form Buyers<\/td>Purchase of new Home Ownership Scheme (HOS) flats and Green Form Subsidised Home Ownership Scheme (GSH) flats.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
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    Calculating Debt-to-Income Ratio<\/h2>\n\n\n\n

    Before and after the stress test, the bank will calculate the applicant’s DTI as a threshold to determine whether the mortgage application is eligible.<\/p>\n\n\n\n

    The formula for “Debt-to-Income Ratio” (DTI) is the percentage of monthly debt payments to monthly income.<\/p>\n\n\n\n

    Trying to do a stress test on your own, the hardest thing to calculate is actually the monthly payment. You can use a mortgage calculator like Spacious<\/a> to enter numbers such as property price, down payment, and mortgage rate to get the monthly payment amount.<\/p>\n\n\n\n

    When conducting a stress test, the mortgage payment referred to the total amount of the loan that the applicant wishes to borrow. The only exception is for first-time homebuyers who purchase a property through a mortgage insurance plan. <\/p>\n\n\n\n

    The insurance covers the portion of the loan that is beyond 60% of the property’s value. For the bank, approving a 60% mortgage and an 80% mortgage should pose the same level of risk.<\/p>\n\n\n\n

    Therefore, some banks might only calculate the monthly payment for a 60% mortgage. As for which type of calculation a bank actually uses, it is recommended that the applicant confirm with each individual bank.<\/p>\n\n\n\n

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    Find or sell properties on Spacious<\/a><\/p>\n\n\n\n

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    Upper Limits for Debt-to-Income Ratio<\/h2>\n\n\n\n

    For both pre-stress test and post-stress test situations, banks have put a cap on DTI. If the application exceeds the limits, the bank will reduce the loan-to-value ratio or even reject the application.<\/p>\n\n\n\n

    DTI’s upper limits are not the same for everyone. Banks will tighten them due to several different factors. Here are some examples:<\/p>\n\n\n\n