Re-mortgage of flats under the Sandwich Class Housing Scheme

Background

The Sandwich Class Housing Scheme (SCHS) was introduced in 1993 to help middle income families to buy their own homes. It comprises an interim loan scheme and a main scheme. The loan scheme, with a grant of $2 billion from public funds, is designed to assist eligible families to buy their own home in the private sector. Successful applicants can borrow up to 25 per cent of the flat price or $550,000, whichever is less, to buy a property that is not older than 20 years and worth not more than $3.3 million. The loan is repaid, in 120 instalments starting from the fourth year after the loan is made. Interest is charged at 2 per cent a year.

2. The Housing Society administers the SCHS for the Government. By September 1996, over 4 000 loans had been granted under the loan scheme.

Re-mortgage arrangements

3. A flat purchased under the loan scheme of the SCHS is subjected to two mortgages - a first mortgage arranged with a bank and a second mortgage provided by the Housing Society. Both mortgages are registered with the Land Registry.

4. The Government has no objection to the Housing Society’s allowing the borrowers under the loan scheme to re-finance their first charges with the banks so long as -

1. the spirit of the loan scheme and the interest of the Government can be safeguarded as before; and
2. any legal or administrative costs for the execution of the necessary legal documents and all incidental expenses will not be borne by the Government.

5. So far, the Housing Society has issued consent to 237 applications to borrowers under the loan scheme for re-mortgage of their flats. A copy of the consent is at Annex. There is a fundamental difference between a re-mortgage arrangement of a flat under the loan scheme and that of a private sector residential flat. In the former case, the Housing Society’s prior approval is required and there is requirement for first discharging the Second Charge in the favour of the Housing Society. There are also other conditions for the Housing Society’s approval of a re-mortgage. [HKHS- please advise what these conditions are.]

6. According to the Hong Kong Monetary Authoriy, the reason for banks taking a conservative approach to re-mortgage is partly due to the legal problems involved. To obtain a new bank loan, the eligible applicant has to discharge the First Charge. It follows that the Second Charge covering the downpayment loan will immediately become the First Charge and the new bank loan can only be secured by a Second Charge. As a result, lending banks have reservations to approve any refinancing applications.

7. While the issue has to be resolved between the eligible applicants and the banks, the Housing Society may ease banks’ concern by agreeing in writing that the new mortgagee shall always have priority over the Second Charge as if it was created and registered prior to the First Charge. (HKMA - please confirm.)To this end, one of the banks has already in consultation with the Housing Society finalised a loan modification document ( with the Housing Society or prospective mortgagors?) with a view to effecting the re-mortgage arrangements. More banks are expected to finalise similar document soon. (HKHS- please advise/confirm.)

Housing Branch
October 1996

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