Mortgage Applications May Be Impacted by Tax Loans, 50% of Monthly Income Cap

Tax bills have been issued by the government, and taxpayers need to pay by the end of the year. Banks have introduced tax loans to meet customer needs. If someone has a tax loan, even if the amount is small, the monthly repayment will be included in the Debt Servicing Ratio (DSR) for mortgage approval. Banks require the DSR ratio to be no more than 50% of monthly income, which could pose challenges for mortgage applications if there is an existing tax loan.

Hong Kong residents who have taken out tax loans should be cautious when applying for mortgages, as such loans can affect the mortgage approval process, according to Paul To, Chief Deputy Managing Director of Century LINK. These tax loans, known for their low-interest rates and flexible loan terms, are becoming increasingly popular with banks, but can act as a barrier to mortgage approval if the monthly repayment amount exceeds 50% of one's monthly income.

When applying for a mortgage, banks review the borrower’s DSR, or debt service ratio, which ensures that monthly mortgage payments do not exceed 50% of the borrower's income. If a buyer has an outstanding tax loan, the monthly installment of this loan must be included in this ratio, significantly reducing the amount of mortgage loan that can be approved. For instance, if a buyer with a $50,000 monthly salary is purchasing a property with a 674,000 HKD purchase price and applying for a 574,000 HKD mortgage loan, at a current interest rate of 3.25% and a 30-year repayment period, their monthly mortgage payment would amount to $25,000. With a $300,000 tax loan requiring monthly payments of approximately $13,000, these payments would make the DSR exceed the 50% threshold, reducing the mortgage approval amount. Therefore, it is advisable to settle all existing loans before applying for a mortgage to meet the income requirement set by banks.

For potential homebuyers, consulting a large and professional mortgage broker in advance can provide comprehensive analysis and evaluation, helping understand one's repayment capacity. Large banks like Centennial LINK also recommend fully paying off all debts before applying for a mortgage. This type of approach ensures that buyers' mortgage applications are not hindered by pre-existing loan obligations. Additionally, it remains wise to understand the various factors influencing mortgage rates, such as base interest rates and potential adjustments, to facilitate smoother and more informed real estate transactions.