Banks in Hong Kong have been known for low interest rates. Rents of most of the properties could cover the monthly mortgage payments. Therefore, some investors would rent out a property right after buying it in order to earn stable passive income. Below are 10 frequently asked questions (FAQs) about how renting out a property would affect mortgage application.
Q1: What is the maximum loan-to-value (LTV) ratio for properties to be rented out?
While applying for a mortgage, if you declare that you buy a property for rental purpose, the maximum LTV ratio would be 50% only. It is also important to note that for properties above HK$10 million, the maximum LTV ratio is only 50% no matter if you declare the purpose to be for self-occupation or for renting out. If you are a landlord and have declared the purpose of buying a property for renting out, the rental income could help you pass the stress test.
Q2: Could a property with high LTV ratio mortgage be rented out?
You have to apply for mortgage insurance through banks for high LTV ratio mortgage and the insurers are usually HKMC and QBE. According to latest regulations, the maximum LTV ratio is 90% under the Mortgage Insurance Programme (MIP) and the purpose could only be used for self-occupation. As for properties to be rented out, the maximum LTV ratio is 50%. Renting out the property after applying for MIP is against regulations. HKMC/QBE would inspect if the property is being occupied by the owner on a regular and random basis. Therefore, the owners who rent out their properties should weigh the risk.
Q3: If I declared the property to be for self-occupation while applying for mortgage, could it be rented out afterwards?
You can do so if the bank agrees. If you would like to rent out a property with a mortgage loan exceeding 50% LTV ratio, you have to withdraw from the MIP and lower the LTV ratio of the mortgage to 50%, which is the standard for a property to be rented out, in order to obtain the bank’s written consent. If the owner rents out the property without notifying the bank and the action is caught by HKMC/QBE or the bank, there is high possibility that the owner has to repay the difference of the LTV ratio.
Q4: After applying for mortgage for a self-occupied property, if I want to rent out the property while having another existing mortgage loan, is it true that the LTV ratio could only be up to 40%?
The LTV ratio has to be lowered to 50% or below if you change the purpose of the property from self-occupation to renting out. Nevertheless, the maximum LTV ratio would not be further lowered to 40%, as the bank from which you applied the mortgage would not review your TransUnion (TU) Credit Report again. But if you transfer the mortgage to another bank, the new bank would lower the maximum LTV ratio as it has to review your TU Credit Report.
Q5: Can I mortgage subdivided flats as the rental income is higher?
Subdivided flats generally refer to subdivision of a flat into two or more individual units. A lot of people believe they could not apply for a mortgage for subdivided flats as it is illegal to rent out. It is true that banks do not accept mortgage application for illegal properties, e.g. properties rented out through Airbnb without a guesthouse license. Nevertheless, subdivided flats could actually be legal and mortgaged if you avoid the following actions:
- Installing doors or iron gates at the entrance of the subdivided units that may hinder evacuation
- Using an industrial unit for domestic purpose
- Blocking the way between the subdivided units and exit staircases
- Installing a toilet and a kitchen at the balcony
- Dividing the property into subdivided units without natural lighting and windows
- Destroying the shear wall, e.g. digging through the wall
Q6: What do I have to do if I want to change the purpose of my mortgaged property from rent out to self-occupation when I apply for mortgage transferal?
If you have obtained the bank’s written consent for an existing mortgage, you need to provide a surrender of lease. Some banks may require proof of residence including water, electricity and gas bill. Some banks may also accept monthly bank statements as proof of residence. You could inquire the bank’s staff for more details.
Q7: Can I mortgage a property with existing tenancy?
Yes you can do so. Property with existing tenancy is usually considered for investment purpose and the maximum LTV ratio would be lowered by 10%. If the tenant could provide a surrender of lease, you may be able to apply for a mortgage for self-occupied property.
Q8: Can rent be considered as an income source when I apply for a mortgage?
Investors may buy multiple properties to rent out. When you apply for a mortgage, you have to ensure if you can afford the down payment and calculate the debt-to-income ratio. Besides salary, rent can also be considered as income. However, it is important to note that banks would deduct maintenance fee, rates, management fee, etc. from the rental income. It is not the case that if the rent is HK$50,000, the bank would take this sum as your income. As long as you can provide proof of rental income, the bank would consider 70% of the rent as your income.
Q9: If I plan to rent out my new property, can I use expected rent as income?
If you plan to rent out the property without tenancy when you buy it, you can use expected rental income to offset the mortgage payment. The bank would estimate the rent of the property and consider 60% as the income of the mortgager. For example, if the bank estimates the rent to be HK$20,000, the income would be HK$12,000.
Q10: Can the rent be considered as income if the tenancy agreement is not stamped?
Yes you can. Banks’ calculation methods differ from each other. Some may have to further deduct the rental income amount, some may consider 70% of the rent whether or not the agreement have been stamped. Nevertheless, property owners are recommended to stamp the tenancy agreement as the court would not accept cases of rental disputes with unstamped tenancy agreement.