The stress test was canceled, but what else will the bank look at?

"Ah Ken, I heard the government has canceled the stress test, does that mean I can borrow more?" A client excitedly called me last week Monday to ask. He thought that once the stress test was canceled, the bank would 'relax' and approve mortgages more easily. But after I explained the bank's actual approval criteria, he realized that 'canceling the stress test' does not equal 'borrowing money easily.'

Many prospective buyers have the same misunderstanding. After the government announced the cancellation of the stress test in 2024, the market erupted in cheers, thinking that the threshold for getting on the property ladder had dropped significantly. But in reality, banks will not approve loans recklessly just because the policy has been relaxed. On the contrary, they will scrutinize your financial situation more carefully to ensure that you are capable of sustaining mortgage payments over the long term. Today, let's break down what banks will actually look at after the cancellation of the stress test, so that you can be truly prepared and successfully get on the property ladder.

Stress Test Cancellation ≠ Lowering Lending Threshold

The Real Meaning of Policy Changes

Many people think that 'cancelling the stress test' means that banks will lend more money to you, but the fact is not like that. What the government has cancelled is only the 'statutory stress test requirement,' which means that banks no longer need to compulsorily calculate your repayment ability after a 3% interest rate increase. However, it is important to note that the banks' own risk management mechanisms have not changed.

:::tip Expert tips After the stress test is canceled, banks will instead focus more on the 'actual contribution ratio' (Debt Servicing Ratio, DSR) and your overall financial health. They will not lower approval standards just because policies are relaxed. :::

According to the latest data from the Hong Kong Monetary Authority, in the first quarter of 2024, over 85% of borrowers in newly approved mortgage cases maintained an actual repayment ratio of below 40%. This figure reflects that banks still maintain a prudent attitude and will not 'fully open the taps' just because the stress test has been removed.

The Bottom Line of Bank Risk Management

Banks are ultimately commercial institutions, and what they care about most is 'whether you can repay the money.' Even if the government cancels the stress test, the bank's internal risk management department will still set its own approval standards. These standards include:

• Debt Service Ratio (DSR): Generally required to not exceed 50%
• Total debt: Includes credit cards, personal loans, car loans, etc.
• Income stability: Self-employed individuals or commission income will be discounted in calculation
• Credit rating: TU score below grade G will affect approval

:::warning Common Misconceptions Some people think that as long as their monthly income is high enough, they will definitely be able to borrow money. But if you have a large amount of other debts or your sources of income are unstable, the bank will still reject you. The removal of stress testing does not mean that the bank will ignore your overall financial situation. :::

The Five Most Important Approval Factors Banks Care About Now

1. Contribution and Income Ratio (DSR)

This is the bank's most core approval indicator. Even without stress tests, DSR is still the bank's 'red line'. Generally speaking, banks will require that your monthly payments (including all debts) do not exceed 50% of your monthly income.

Practical Calculation Example:

• Monthly Income: HK$40,000
• Property Price: HK$6,000,000
• Mortgage Ratio: 70% (Borrow HK$4,200,000)
• Interest Rate: 4.125%
• Repayment Period: 30 years
• Monthly Payment: Approximately HK$20,400

In this example, the contribution ratio is 51% (HK$20,400 ÷ HK$40,000), which already exceeds the bank's 50% limit. Even if the stress test is waived, the bank is still very likely to reject the application or require you to increase the down payment.

2. Authenticity and Stability of Income Proof

Banks are now stricter in reviewing income verification than before. They not only look at your pay slips, but also require you to provide:

• Bank statements for the last 6 months: to verify that the salary amounts were actually deposited
• Tax form (IR56B): to verify declared income
• Employment contract: to confirm position and salary structure
• Company background: if it is an SME, the bank may check the company's financial status

:::highlight Insider Tip Self-employed individuals or applicants whose income includes a large amount of commission need to pay special attention. Banks usually calculate commission income at 60-70% and may even require tax records for the past two years before agreeing to include it as income. If you are self-employed, it is recommended to prepare complete financial documents in advance. :::

3. Credit Rating (TU Credit Score)

Credit rating is an important indicator for banks to assess your "repayment credit." Even if you have a high monthly income and a reasonable repayment ratio, if your TU score is too low, the bank will still reject your application or increase the interest rate.

TU Credit Rating:

• Grade A (Highest): Almost all banks will approve, and you might even get the best interest rates
• Grade B-D: Most banks will approve, but interest rates might be slightly higher
• Grade E-G: Some banks may reject the application, or require a higher down payment
• Grade H-J (Lowest): Very difficult to get mortgage approval

Common factors affecting TU scores:

• Late repayment of credit cards
• Unpaid personal loans
• Bankruptcy or debt restructuring records
• Frequent applications for credit cards or loans

:::warning Guide to Avoiding Pitfalls Many people don't know that even if you make payments on time, frequently maxing out your credit card (using over 80% of your credit limit) can still affect your TU score. It is recommended that 3-6 months before applying for a mortgage, you reduce your credit card balance to below 30% of your credit limit. :::

4. Total Existing Debt

The bank will calculate your 'total debt burden,' including:

• Credit card debt
• Personal loans
• Car loans
• Student loans
• Other mortgages (if you already own property)

Even if you earn a high monthly income, if you have too much existing debt, the bank will still worry that you won't be able to afford a new mortgage.

Real Case: A Ming earns HK$60,000 per month and wants to buy a property worth HK$8,000,000, taking a 70% mortgage (HK$5,600,000). However, he has the following debts:

• Personal loan monthly repayment: HK$8,000
• Credit card minimum repayment: HK$3,000
• Car loan monthly repayment: HK$5,000

The new mortgage monthly payment is about HK$28,600. Adding the existing debts, the total payment is HK$44,600, accounting for 74% of the monthly income. The bank ultimately rejected the application, requiring him to repay part of the debt first.

5. Initial Sources and Flow of Funds

The bank will review the source of your down payment to ensure the funds are legal. If a large sum of money suddenly enters your bank account, the bank will ask you to explain its source.

Sources of Down Payment Accepted by Banks:

• Personal savings
• Gifts from parents or relatives (requires signing a “Gift Deed”)
• Proceeds from selling a property
• Cashing out stocks or funds

Sources of Down Payment Not Accepted by Banks:

• Borrowing (including personal loans and finance company loans)
• Cash of unknown origin

:::tip Expert Tips If the down payment is a gift from the parents, the bank will require the parents to sign a 'Gift Deed' to prove that this money is given without charge and does not need to be repaid. At the same time, the bank may require checking the parents' bank statements to confirm that the source of funds is legitimate. :::

Practical Case: The Actual Approval Situation After the Stress Test Was Cancelled

Case 1: High-Income but Heavily Indebted Professionals

Background:

• Applicant: Jason, 35 years old, accountant
• Monthly income: HK$80,000
• Target property price: HK$10,000,000
• Mortgage ratio: 70% (borrowing HK$7,000,000)
• Existing debts: Personal loan monthly repayment HK$15,000, credit card debt HK$200,000

Approval Result: Rejected

Cause Analysis: Although Jason has a high monthly income, his new mortgage requires monthly payments of about HK$35,700. Adding his existing debts of HK$15,000, the total payments reach HK$50,700, accounting for 63% of his monthly income, far exceeding the bank's 50% limit. The bank advised him to first repay his personal loans and credit card debts before reapplying.

Solution: Jason spent 6 months paying off personal loans and reduced his credit card debt to HK$50,000. After reapplying, the total debt-to-income ratio dropped to 48%, and the bank ultimately approved the mortgage.

Case 2: Challenges of Income Proof for Self-Employed Individuals

Background:

• Applicant: Amy, 40 years old, self-employed designer
• Monthly income: HK$50,000 (average)
• Target property price: HK$6,000,000
• Mortgage ratio: 70% (borrowing HK$4,200,000)
• Source of income: client project income, monthly fluctuations are significant

Approval Result: Conditionally Approved

Cause Analysis: Amy's income is unstable, and the bank requires her to provide tax records and bank statements from the past two years. Since her reported taxable income averages only HK$35,000/month (some income was not reported), the bank is only willing to calculate her repayment ability based on HK$35,000.

Solution: Amy increased the down payment to 40%, reducing the loan amount to HK$3,600,000, with a monthly repayment of about HK$18,400, lowering the repayment ratio to 53%. The bank ultimately approved the mortgage, but the interest rate is 0.25% higher than that for general salaried individuals.

:::success The secret to success For self-employed individuals who want to successfully get a mortgage approved, it is best to do tax planning 1-2 years in advance to ensure that the reported tax income can reflect the actual income level. At the same time, maintaining a stable record of funds flowing into bank accounts can help improve the bank's confidence. :::

Case 3: The Issue of Down Payment Sources for Young First-Time Homebuyers

Background:

• Applicant: Chris, 28 years old, bank clerk
• Monthly income: HK$35,000
• Target property price: HK$5,000,000
• Mortgage ratio: 80% (borrowing HK$4,000,000, using mortgage insurance)
• Source of down payment: HK$1,000,000 gifted from parents

Approval Result: Approved

Reason Analysis: Chris's monthly income and contribution ratio meet the requirements (monthly contribution is about HK$20,400, accounting for 58% of monthly income, acceptable under the mortgage insurance scheme). However, the bank requires him to provide his parents' gift deed and their bank statements to prove that the source of the down payment is legitimate.

Key Steps:

1. Parents sign the gift deed, stating that HK$1,000,000 is a gratuitous gift.
2. Provide parents' bank statements for the past 6 months to prove that the source of funds is legitimate.
3. Chris provides his own bank statements for the past 6 months to prove there are no other hidden debts.

:::highlight Insider Tip If the down payment is gifted by parents, it is recommended to transfer the funds into your own account 3-6 months in advance and keep a complete record of the transactions. This can help avoid the bank questioning the source of the funds and speed up the approval process. :::

How to Improve the Success Rate of Mortgage Approval?

Prepare financially 6 months in advance

Don't wait until you view your ideal property before starting to prepare mortgage documents. It is recommended to complete the following preparations 6 months in advance:

1. Clear debts: Try to pay off credit card debts and personal loans
2. Stabilize income: Avoid changing jobs or altering your income structure
3. Improve TU score: Make payments on time and reduce credit card utilization
4. Save for down payment: Ensure a stable cash flow in your bank account

Choosing the Right Bank and Mortgage Plan

Different banks have varying approval standards and interest rates. It is recommended to apply for a mortgage with 2-3 banks at the same time and make a decision after comparing the terms.

Factors to Consider When Choosing a Bank:

• Interest Rate: H rate vs P rate, which is more advantageous?
• Cash Back: Some banks offer up to 1-2% cash back
• Penalty Period: Usually 2-3 years, early repayment incurs a penalty
• Approval Speed: Some banks approve faster, suitable for buyers who need to get on the property ladder quickly

:::tip Expert Tips If your financial situation is more complicated (for example, self-employed, fluctuating income, or having multiple debts), it is recommended to seek help from a professional mortgage broker. They are familiar with the approval standards of different banks and can help you choose the most suitable bank, increasing the likelihood of approval. :::

Prepare a complete list of documents

Bank approval for a mortgage requires a large amount of documents, and not having them all prepared can slow down the approval process. Below is a list of common documents:

Salaried Individuals:

• Copy of ID card
• Payslips for the last 3 months
• Bank statements for the last 6 months
• Latest annual tax return (IR56B)
• Employment contract
• Proof of address

Self-Employed Individuals:

• Copy of ID card
• Tax records for the past two years
• Bank statements for the last 6 months (company account + personal account)
• Company registration certificate
• Business registration certificate
• Proof of address

Proof of Initial Payment Source:

• Bank monthly statement (showing the source of the initial payment)
• Gift deed (if the initial payment is a gift from parents)
• Property sale contract (if the initial payment comes from the proceeds of a property sale)

Avoid 'Landmine' Behaviors Before Applying for a Mortgage

Many people don't know that certain actions before applying for a mortgage can affect the approval result. Here are some common "pitfalls":

1. Frequent job changes: Banks will question the stability of your income.
2. Applying for a new credit card or loan: This will lower your TU score.
3. Large cash deposits: Banks will require an explanation of the source of funds.
4. Becoming a guarantor for someone else's mortgage: This will affect your borrowing capacity.

:::warning Guide to Avoiding Pitfalls In the six months before applying for a mortgage, try to avoid any actions that could affect your financial situation. If you really need to change jobs or apply for a loan, it is recommended to first consult a mortgage broker or bank to understand whether it will affect mortgage approval. :::

Summary: After the stress test is canceled, preparation becomes more important

After the stress test was cancelled, many people thought that the barrier to getting a mortgage had been lowered, but in reality, the bank's approval standards have not relaxed. They will still carefully review your payment ratio, income stability, credit rating, existing debts, and the source of your down payment.

Remember these key points:

• The contribution ratio should not exceed 50% of the monthly income
• Clear debt 6 months early and improve TU scores
• Self-employed individuals must prepare complete proof of income
• The source of the down payment must be legal, and it is best to transfer it to your own account in advance
• Avoid "landmine" behaviors such as changing jobs and applying for new loans before applying for a mortgage

As long as you are well prepared, even if the stress test is canceled, you can still successfully get your mortgage approved and successfully buy a home. The property market changes quickly, but as long as you understand the banks' approval logic, you can take control and choose the mortgage plan that suits you best.

Want to learn more about mortgage strategies? Welcome to subscribe to our blog, where we share the latest real estate information and practical home-buying tips every week. If you have questions about your financial situation or want to know which bank suits you best, feel free to leave a comment for discussion or send a private message for consultation. We will provide professional advice based on your actual situation to help you successfully purchase your home!