More Hong Kong homebuyers are expected to shift to cheaper mortgages linked with the Hong Kong one-month interbank offered interest rate (Hibor) after all of the city’s major commercial banks said they would not cut their prime lending rates any further, according to analysts.
The city has two major types of home loans – one priced according to banks’ prime lending rates, the other according to the Hibor. “It is natural that more new home loan borrowers will turn to Hibor-linked mortgages and enjoy lower interest rates for their monthly repayments, as the Hibor is set to follow US interest rates and see further cuts,” said Gordon Tsui, chairman of the Hong Kong Securities Association.
As of January this year, 80 per cent of new mortgages were priced according to the Hibor, according to data by the Hong Kong Monetary Authority, the city’s de facto central bank. In 2008, such mortgages represented only about 4 per cent of new loans, with the rest linked to prime lending rates. The rising popularity of Hibor-linked mortgages over the past decade is very much linked to banks’ reluctance when it comes to cutting prime lending rates.
While the HKMA followed the US Federal Reserve in cutting its base lending rate to 0.86 per cent on Monday, all of Hong Kong’s major banks kept their prime lending rates unchanged. HSBC, the city’s biggest bank, its subsidiary, Hang Seng Bank, and Bank of China (Hong Kong) kept their rates at 5 per cent. Standard Chartered bank and the Bank of East Asia, meanwhile, kept their prime lending rates at 5.25 per cent.
In December 2008 and December 2015 too, when the Fed cut its rates close to zero, Hong Kong banks kept their prime rates between 5 per cent and 5.25 per cent. Their prime rates rose once by 0.125 per cent in 2018, before falling back to the current level in November 2019.
“It is hard to go any further, as the banks’ profitability is very thin already,” said Eric Tso Tak-ming, chief vice-president of mReferral Corporation, a mortgage consultancy. Most banks price their mortgages between the prime lending rate minus 2.5 per cent and minus 3 per cent, which translates to mortgage rates of 2 per cent to 2.5 per cent. Should the prime rate fall further and the actual mortgage rates were to fall to 1.75 per cent, that would be below the cost of funding for most banks, Tso said.
For new homebuyers, or those refinancing their mortgages, Tso said Hibor-linked loans were more attractive as there was a chance the one-month Hibor will fall by one percentage point in the future. This could save borrowers HK$2,000 (US$257.5) a month based on a typical HK$4 million mortgage with a 30-year tenure, based on Bank of China (Hong Kong) data.
Of course, borrowers with mortgages linked with the Hibor will face higher repayments if the rate rises. But, with the United States starting another rate-cut cycle, they are currently expected to enjoy lower interest rates.
The one-month Hibor rose to 1.26 per cent on Monday morning from 1.14 per cent on Friday, which HKMA chief executive Eddie Yue said was related to IPO fundraising. “After the demand for IPO funding falls, the Hibor will go down with US interest rate cuts,” Yue said.
The one-month Hibor fell from 3.76 per cent in September 2008 to 0.23 per cent in January 2009, after the Fed cut its rates to close to zero. The rate did not rise above 1 per cent until January 2018. This capped Hibor-linked mortgages at between 1.5 per cent and 2.5 per cent over the past decade, according to mReferral data.
Additional reporting by Alison Tudor-Ackroyd
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