On 19 Aug 2010, the HKMA implemented prudential measures for residential mortgage lending, standardizing the debt servicing ratio limit to 50% with stress testing for a 2-percentage-point rate increase and capping stressed DSR at 60%. The measures also set a 60% LTV ratio for high-value and non-owner-occupied properties, effective 13 Aug 2010 (with stress testing commencing 15 Sep 2010), reducing maximum mortgage amounts by up to 22% for borrowers.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Implementation of Prudential Measures
On 19 Aug 2010, the Hong Kong Monetary Authority (HKMA) issued a circular effective 13 Aug 2010 mandating prudential measures for residential mortgage lending by authorized institutions, standardizing key risk parameters to enhance financial stability.
Key Regulatory Changes
The measures establish a maximum loan-to-value (LTV) ratio of 60% for properties valued at or above HK$12 million and for non-owner-occupied properties. They standardize the debt servicing ratio (DSR) limit to 50% for all borrowers, require stress testing assuming a minimum 2-percentage-point mortgage rate increase, and cap the stressed DSR at 60%. The HKMA also formalized supervisory guidance to use prime-based interest rates (not HIBOR) for DSR calculations on HIBOR-based mortgages to address HIBOR volatility.
Implementation Timeline and Impact
The LTV and DSR standardization measures took effect on 13 Aug 2010, while the stress testing requirement commenced on 15 Sep 2010. The circular notes that these measures reduce the maximum mortgage loan amount for borrowers; for example, a high-income household with a HK$50,000 monthly income would see borrowing capacity fall by 16.7% upon DSR standardization (13 Aug 2010) and by 22.3% after stress testing (15 Sep 2010), compared to pre-measure levels.
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