For homeowners on mortgage, a bank calling your loan is probably the worst nightmare. For those who rent out the flat on mortgage insurance, or cryptocurrency aficionados, the call may come sooner than others. However, there is a solution.
Theoretically banks have every right to call loans anytime, practically arbitrarily, as stated in the loan facility letter. In reality, loan recall is extremely rare so long as one repays on time and fulfils the terms of agreement. Even during an eye-watering drop in the property market when loan becomes negative equity for banks, they tend to wait it out.
Recently, we have observed two common scenarios that could cause a bank to recall mortgage loans.
The first is when one breaches the use of property declaration. Property must be self-occupied by borrowers of loan-to-value (LTV) ratio above 50 per cent as the Hong Kong Monetary Authority (HKMA) requires. Renting out the property could lead to banks demanding full repayment, especially for loans covered by mortgage insurance programme (MIP), that is, LTV ratio higher than 60 per cent.
As a standard procedure, mortgage borrowers must declare property use during MIP application. After drawdown, both the bank and the Hong Kong Mortgage Corporation, under the HKMA, periodically require borrowers to re-declare self-occupancy with documentary proof, such as providing utility bills registered with the owners’ name.
False declaration is a criminal offence. Multiple mortgage borrowers were sentenced to jail recently for claiming the house as personal use while in fact it was rented out. When the property is no longer self-occupied, an honest declaration could save you from criminal proceedings. Banks, though, may recall the mortgage loan if it ceases to conform to the owner-use terms.
It is an established practice to require continuous declaration of self-occupancy throughout the loan period. Yet with the government’s enhanced effort to rein in property speculation to ease a housing shortage, banks and HKMC have stepped up enforcement of such requirements.
Banks only randomly chose some MIP clients to re-declare use of property in the past. Lately we have seen some banks extending such requests to all MIP borrowers every year. It is far more difficult for homeowners to discreetly rent out the flats, and to repay the 90 per cent bank financing with rental income. Doing so would, at the very least, run the risk of committing a criminal offence of false declaration.
Your bitcoin investment could also cause your loan to be recalled. We have witnessed banks closing bank accounts with heavy cryptocurrency trading, naturally terminating the account owner’s mortgage loan. Trading digital currency is a risky activity for banks, as it is a hotbed for money laundering. A transaction associated with bitcoin or other cryptocurrencies could alert lenders to take action without prior notice.
Customers could trade cryptocurrency C2C, or customer-to-customer, where money is directly wired to the unknown buyer/ seller’s bank accounts. However, one must be vigilant since the counterparty may be involved in money laundering, and already on the watch list of anti-money-laundering bodies for perpetrating frauds and scams. Dealing with such a person and having money back-and-forth can lead to banks severing business ties with you, even when you have nothing to do with laundering.
Following the financial crisis in 2008, banks paid enormous fines for failing to detect money laundering. Now, they err on the side of caution and are prone to de-risk any doubts from customers’ activities. If the bank account is closed, so is the mortgage loan associated with it.
If you really want to embrace high-risk, high-return crypto investment, trade it with a more crypto-friendly bank instead of your mortgage lender.
What if the bank does recall your mortgage loan? Relax, it is not the end of the world.
One can simply refinance the mortgage loan with another bank. The initial bank usually gives ample time to complete refinancing after announcing a loan recall. One point to note is that, if your loan is covered by the MIP programme with LTV ratio above 60 per cent, you will need to refinance the loan with another mortgage insurance company to keep the coverage.
At the moment there are two mortgage insurance companies in Hong Kong, HKMC and QBE. Assuming your original MIP loan is covered by HKMC, try switching it to another bank tied to QBE.
Raymond Chong is chief executive officer and founder of mortgage referral brokerage firm StarPro Agency
