Prime time for mortgage holders

PUBLISHED : Monday, 06 June, 2011, 12:00am
UPDATED : Monday, 06 June, 2011, 12:00am


Arcane policy discussions going on at the US Federal Reserve will soon start to seem very real to Hong Kong mortgage holders.

That is because, as the US inches its way out of recession, the Fed will start raising its benchmark Fed funds rate. Hong Kong's mortgage benchmark, Hibor, is already on the move, with Citi projecting that one-month rates will climb 0.68 per cent in the next 12 months.

That may not sound extreme, but to put that into perspective, the rise would add about HK$2,000 to a family's monthly mortgage bill - assuming a 20-year, HK$7 million mortgage.

More dramatically, Citi projects that short-term Hong Kong rates will rise about 4.2 per cent over the next four years, which would add about HK$14,000 to the same family's monthly mortgage costs.

The technicalities of why Hibor rates are going up are beyond the scope of this discussion. Suffice it to say Hong Kong rates are linked to US rates. As the US climbs out of its steep recession, benchmark interest rates are expected to rise next year, if not before that.

For those in Hong Kong seeking a mortgage or to refinance an existing mortgage, the discussion becomes whether one should get a fixed-rate home loan or a floating-rate loan based on Hibor or the prime rate.

Both Hibor and prime are benchmark rates against which banks set mortgage rates. If the benchmark changes, so does the interest payment on the mortgage, hence the name floating rate.

About 1 per cent of borrowers have a fixed rate. This is a legitimate means of taking a mortgage, but clearly not a very popular one. Lenders do not like to be exposed to rate changes, so they make mortgage holders pay relatively high fixed rates if they want to offload this risk onto the banks.

The real contest is between Hibor and prime mortgages, with Hibor recently losing popularity because of the rate increases.

According to the Hong Kong Monetary Authority (HKMA), about 9 per cent of the mortgage loans approved in April were priced with reference to the prime rate, the rate at which banks will lend to their best customers. The proportion of new mortgage loans priced with reference to Hibor dropped to 89.8 per cent at the same time.

'Given that the Hibor and prime mortgage rates are getting closer, we foresee more customers will opt for prime-based plans,' says Jammy Chen, head of secured lending, northeast Asia, Standard Chartered Bank.

Prime rates are set by each bank, and they usually track the US Fed rate, which is rarely changed outside of Fed committee meetings (there are eight scheduled meetings a year).

Hibor moves daily according to the ebb and flow of money markets and so is a much more volatile benchmark. So Hibor is going up, and it is volatile.

Meanwhile, in April and last month, Hong Kong banks twice raised the spread over Hibor that they charge for Hibor-linked loans. Standard Chartered, for example, raised its spread from Hibor plus 0.9 per cent to Hibor plus 1.5 per cent, which the bank attributed to the rising interest it pays for deposits.

At the time of the increases, the HKMA warned that a property bubble was soaking up Hong Kong's available credit, driving up lending rates.

Prime mortgages have, meanwhile, stayed steady, largely because banks market these mortgages as being relatively stable, and they hate to reset those rates. That has all meant that Hibor-linked mortgages are becoming about as expensive as prime-linked mortgages.

And, as prime and Hibor rates converge, mortgage seekers may see an advantage in the relative stability of prime loans.

'Hibor mortgages may lose their attractiveness for new mortgage applicants, and we may see a shift back to prime mortgages when the interest rates continue to climb,' says Lawrence Lam, director of sales and secured lending at Citibank Global Consumer Group.

All things being equal, Hibor-based mortgages are generally cheaper than prime mortgages. But Hibor rates are going up and will likely be more volatile. These are all factors that mortgage seekers will need to factor into their calculations.

What is it?

Hibor stands for Hong Kong interbank offer rate - it is the rate that banks charge when they lend to each other. The interbank market is very active, and the rate is therefore volatile. It is the best expression of banks' willingness to lend money, because it is up to date and not subject to extraneous factors. Hibor is commonly used as a benchmark for lending in Hong Kong dollars, with banks or other institutions charging a spread over Hibor for lending to non-bank clients.