Mortgage Solution: Gist of Asset-based Lending
Asset-based mortgages offer a path to home ownership for people who could not provide regular income proof, and have to rely on their net worth to demonstrate their repayment ability. This article explains key points to note when applying for an asset-based mortgage, to help you prepare a budget for buying a home.
Mortgage application assessments are usually based on the borrower's income and ability to repay. For people with high net worth but cannot provide a regular income proof, or retirees who have fully funded their properties, asset-based mortgages are an alternative that better suits their situation.
Features of an Asset-based Mortgage
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As a buyer nears retirement age, the mortgage repayment period for which they can apply is shortened. Even if the applicant still has some income, due to the shorter repayment period, the income requirement would still be higher than that of younger applicants. Asset-based mortgages may provide an alternative for these buyers. However, asset-based mortgages also have their limitations. Generally speaking, the applicant will need to prove that the net asset value they own is not less than the total property price of the new mortgaged property, the relevant stamp duty and the sum of their liabilities. The loan-to-value ratio is generally only 60% regardless of the property value. If applicants have borrowed or guaranteed other outstanding mortgage(s) at the time of making a mortgage application, the loan-to-value ratio caps will be lowered by 10 percentage points. |
Calculating the Net Value of Your Assets
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So, how is the net worth calculated? Net asset value is the total value of eligible assets minus the total value of liabilities. Eligible assets include the local property (at a discounted rate of market value), local stock market value, deposits, mutual funds and bonds1,2. Liabilities include existing mortgage loans, credit card debts, financial guarantees for others and so on2. However, it is worth to note that when calculating net asset value, banks will not account for 100% of the property's market value; they may, for example, only take 50% of the value into account. You should check with the bank first for the actual valuation.
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Case Study: Helen (Retiree)
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| Eligible Assets | Newly Purchased Property | |
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| Not yet fully paid off property with a market value of $9M (unpaid loan or current mortgage outstanding $1M) Cash deposit of $6.5M No other liability |
Property value $7.5M | |
| Eligible Assets: Net asset value of existing property $3.5M (50% of the Bank's valuation - outstanding mortgage loan $1M) + cash deposit $6.5M = $10M | - | |
| Asset-based mortgage requirement: | ||
| $10M total eligible asset | More than | $7.5M property price + $0.225M ad valorem stamp duty (AVD) + $1M unpaid mortgage |
| Since Helen's total eligible asset value is more than the overall liabilities, including her newly acquired property and the applicable stamp duty (i.e. the net asset value is positive), she meets the requirement for an asset-based mortgage. | ||
*This example is for reference only. The calculation methods used by different banks may vary.
Points to note:
- Helen wants to apply for an asset-based mortgage. After review, the bank accepts that her net asset value is positive – that is, more than the overall liabilities, including the value of the new property, stamp duty & other debts.
- When calculating the net asset value, the value of her property needs to be based on the bank's estimated value and discount rate.
- Since Helen has borrowed another outstanding mortgage at the time of making a mortgage application, the loan-to-value ratio will have a 10% cut from the maximum cap for asset-based lending, i.e. from 60% to 50%, so the maximum loan amount for the new property will be $3.75M.
- It is worth noting that even if the first property under Helen's name is fully paid off, since she is the guarantor for a mortgage on other properties, the outstanding loan of the guaranteed property needs to be calculated in her net asset value, and the loan-to-value ratio will still drop to 50%.
Further Reading：At a Glance: Understanding the Different Obligations of Mortgagor, Borrower and Guarantor
Tips:
- For assets under joint ownership, the equal sharing concept is applied where the asset value will be equally divided by the number of account holders. However, for liabilities including any guaranteed loan outstanding will be fully calculated. For details, please inquire with the bank you are seeking a mortgage from.
To borrow or not to borrow? Borrow only if you can repay!
Note: Mortgage loan approval is subject to the applicant's personal circumstances and the applicable terms and conditions and policies at the time. Approval is subject to credit assessment and the bank reserves the right of final decision.
All information is for reference only. All services provided by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) are subject to the prevailing terms and conditions and the applicable terms and conditions shall prevail if there are any inconsistencies or discrepancies with the content. HSBC is not responsible for any liabilities, costs, damages, or any consequences stemming from reliance on the information provided. Content provided should not be treated as any investment or legal advice or professional opinion, and is not solicitation or advice of any products or services. HSBC does not guarantee the accuracy, timeliness or completeness of this information, and information may be subject to change without prior notice.
Issued by The Hongkong and Shanghai Banking Corporation Limited