Hong Kong extends pilot fixed-rate mortgages scheme by a year, lowers interest rates to combat pandemic fallout

Lam Ka-sing
·4-min read

The Hong Kong Mortgage Corporation (HKMC) has extended a pilot scheme for fixed-rate mortgages by a year, and said interest rates will also be lowered further, as the city faces rising unemployment and a recession amid the coronavirus pandemic.

The application period for the Fixed-rate Mortgage Pilot Scheme has been extended until October 30, 2021. The scheme started receiving applications from Monday.

This comes as the pandemic continues to adversely affect the local job market. The Hong Kong government recently said the city’s unemployment rate had almost hit a record 16-year high. Moreover, in the latest quarter, new cases of negative equity – when a home loan exceeds the market value of the property involved – increased by about 60 per cent quarter on quarter.

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“The Fixed-rate Mortgage Pilot Scheme aims to provide an alternative financing option to homebuyers for mitigating their risks arising from interest rate volatility, thereby, enhancing banking stability in the long run,” HKMC said in a statement.

The interest rates charged have also been reduced from when the scheme was first introduced in the Budget on February 26. For instance, the rate for the 10-year fixed-rate period declined from 2.75 per cent to 2.55 per cent to 1.99 per cent, eventually.

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At 1.99 per cent, the rate is only 0.17 percentage points higher than Monday’s actual mortgage rate of 1.82 per cent linked to the Hibor, or the Hong Kong Inter-bank Offered Rate, helping homeowners lock in a low rate, mReferral Mortgage Brokerage Services said.

The aggregate loan amount of the scheme is HK$1 billion (US$128.9 million), with each private residential mortgage not exceeding HK$10 million.

As borrowers will be insulated from interest rate movements during the fixed-rate period, which is 10 years or longer, the HKMC has obtained an agreement from the Hong Kong Monetary Authority that it will not require stress testing against interest rate rises, and that the current debt to income ratio will still be applicable.

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“It will benefit those who might have lost their jobs, or had their salaries cut and cannot now meet stress testing if they borrow from banks. We might see more people’s incomes shrinking and they cannot apply for mortgages as planned before,” Cookie Wong, managing director of Ricacorp Mortgage Agency, said, adding that it was better to have a mortgage at a slightly higher rate than no mortgage at all, which could also mean surrendering a home that has already been bought and the loss of deposits. This was particularly true for those who are on the verge of starting their payments, Wong said.

Since the adjusted fixed interest rate was similar to the floating interest rate, this greatly enhanced its attractiveness, Raymond Chong, managing Director of StarPro Agency, said, adding that 80 per cent of mortgage applicants might use the scheme it in the future. It might even attract prospective owners whose mortgages had been approved, he added.

And if a large enough number of prospective homebuyers choose a fixed interest rate plan, banks might lower their mortgage interest rates, or increase cash rebates, to maintain their competitiveness, Chong added.

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Mortgages for complete and incomplete properties plummeted 48.3 per cent and 36.1 per cent, respectively, year on year in October, according to mReferral and the Land Registry. The drops reflected the impact of the third coronavirus wave on the local economy, which had led buyers to take a wait-and-see approach, said Eric Tso, mReferral’s chief vice-president.

“The economy still has not improved,” he said, adding that coupled with the continued tensions in US-China relations, banks were expected to take a cautious approach to mortgages because of the increasing credit risks at companies.

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