Secured loans are rising in Hong Kong. According to HKEconomy.gov.hk, the household debt in this region grew considerably after the Global Financial Crisis in 2008 and a big share of this borrowing is focused on secured debts.
But what exactly does it mean to have this type of debt?
Secured loans refer to a type of consumer loan that requires a collateral before you can borrow. It is deemed to be ͞secure͟ because the lender will hold an asset as security for the money you will borrow. In case you fail to pay back the loan or meet the terms of the contract, the lender or creditor can get this asset to compensate for their losses.
The sale of the asset should help minimise the loss brought about by your inability to pay the loan. This arrangement is the reason why most secured loans have low interest rates.
This is a low-risk investment for creditors and lender because they have the collateral to fall back on. Overall, it saves the borrower a lot of money in terms of the interest amount that they will pay until the maturity of the loan. However, it does put their asset at a high risk.
Two secured loan options in Hong Kong
There are two main secured loan options in Hong Kong: Property and Car Loans.
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This is probably the most expensive loan that you can borrow. The main quality of a property loan is the fact that the collateral is usually a real estate property. For the average borrower in Hong Kong, the collateral is usually their home. There are several ways that you can get a property loan.
● Mortgage or home loan. This is a loan that you will use to buy a house or any real estate property. According to the data provided by the HKMA or Hong Kong Monetary Authority, the mortgage applications in the region increased by 16.5% from April to May of 2016.
This means the current outstanding balance of home loans was HK$1.08 trillion by the end of May. When you buy a house through a home loan, a deposit will always be required. You can never buy a house by borrowing 100% of the property’s value.
After the purchase, the property’s title will be under your name. However, the lender will keep the title of the house as a collateral. You are allowed to use the property as your own residence or as a rental property and all the other expenses like the insurance, property taxes, and upkeep costs will be your responsibility.
In the event you fail to pay your monthly mortgage payments, this can compromise your ownership of the property. The mortgage lender can take your house and sell it to recoup their losses because of your inability to pay them back.
● Home Equity Loan. This is a type of property loan that will let you borrow against the equity of your house. Even if you have yet to complete the mortgage payments, you can take out this loan to help consolidate multiple debts or use it to increase your cash flow.
Let us say the value of the house is HK$500,000 and you have an outstanding home loan of HK$300,000.
That means you have an equity of HK$200,000 in your house. You can borrow against that amount – or at least up to a certain percent only.
● Refinancing. This is a type of loan that will allow you to convert your original mortgage loan into a new one. Ideally, you want to opt for this type of loan to help you take advantage of lower interest rates or better terms.
● Bridging Loan. This is a property loan that will help you meet costs while you are transitioning between your old property and the new house. This is ideal for borrowers who sell an old house to finance a new one.
There are cases wherein the deposit and fees are already needed for the new house but the sale of the old house is not yet complete. This is where a bridging loan can help the owner bridge the expenses.
● Car Park Loan. As per the name, this is a loan that you can take to buy a parking slot for your vehicle. This can be borrowed together with a home loan or even after you have purchased a property.
A car loan is another long-term investment that will allow you to be a car owner. Although this is not as big as a property loan, it is still a common loan among Hong Kong residents because not everyone has enough cash to buy a vehicle.
If this will help make your commute to work easier and will open doors for you to travel with your family, this can be a great investment for you.
Car loans are often times offered by car dealerships through their in-house financing schemes. While this will make the documentation easier and faster, the interest rates are usually higher compared to what banks and external financial institutions offer.
Like property loans, you are required to pay a cash deposit. The car loan will not cover 100% of the car’s value.Tips when borrowing secured loans. As mentioned, a secured loan allows you to borrow money but you have to put up a collateral.
If you default on the loan payments, the property or car that you used as collateral will be seized by the lender to compensate for the loss.
Given this risk, here are tips that will help you make wise choices about secured loans:
● Take care of your credit score. The better the credit score, the lesser the interest rate that the lender will give. This will help you save a lot when it comes to the interest amount that you need to pay on the loan.
● Prioritise these payments. Since the collateral is at stake, you should always prioritise this type of debt. At least, this is true compared to credit cards or other types of debt that you owe.
● Never borrow more than what you can afford to pay monthly. A house is a great investment because the value appreciates over time. However, it will never be completely yours until you finish paying off your mortgage. Be conscious of the monthly payments and make sure you know where that money will be coming from.
● Be wise about borrowing against the equity in your house. Seeing the growing equity of your house as you pay off the mortgage will give you a great feeling. However, you need to be careful when borrowing against it.
Do not put the house at risk if the home equity loan will only be used to buy a car in cash or pay off high-interest credit card debts.
● Be on the look-out for low-interest rates. Refinancing is a great option if you can save on the interest in the long run. However, make sure you do your calculations. Sometimes, the low-interest rate is nothing compared to the refinancing fees and the prepayment penalties that you will be charged for the transaction.
● Pay as much deposit as you can. When borrowing secured loans, try to put down as much deposit to minimise the value of the debt. This is especially true for car loans. Unlike home loans, you are buying an asset that will depreciate over time.
You will end up paying a lot more than the value of the car. Opt for a high deposit and the lowest interest rate that you can manage.