Shifting fortunes of Hibor and prime
After making the biggest investment decision of her life to buy a flat in Hong Kong, Palanka Luk is now wrestling with another challenge - what type of mortgage should she choose?
'A prime-linked rate, or a loan linked to the Hong Kong interbank offered rate (Hibor)?' mused the single office worker in her mid-30s.
Luk, who has just bought a 650 square foot flat in Island East for HK$5.3 million, hopes to repay a 70 per cent loan over 30 years and is tempted by a Hibor-linked loan.
Analysts have estimated that Hong Kong mortgage rates are unlikely to rise sharply this year, and Luk considers that interest rates will remain at a low level for some time, citing the fact the US Federal Reserve forecast the present regime of low rates would probably last until 2014.
Hong Kong pegs its currency to the US dollar, which means interest rates here must track US rates closely to maintain a stable exchange rate, although there may be small variations in the lending rates charged by the city's banks.
Since 2000, Hong Kong mortgage rates have held in a tight range about three percentage points above the so-called Fed funds target rate, which is the regulated interest rate on overnight loans between banks.
In Hong Kong, Hibor-linked loans are offered at a small and floating premium to the local interbank rate. At present they offer a lower rate than prime-based loans, mReferral chief economist Sharmaine Lau said.
Borrowing costs of Hibor-based loans averaged just 0.9 per cent early last year, close to the lowest rates in 20 years, mReferral Mortgage Brokerage Services' data showed. That explained why more than 90 per cent of mReferral customers chose such loans early last year, Lau said. 'But the trend has now turned. Last month, more than 90 per cent of our clients returned to the traditional prime-based mortgage plans.'
The move was partly explained by the fact that rising Hibor rates had narrowed the gap between prime-based and Hibor-based loans, and also increased the risk of taking a floating-rate plan in an environment of rising rates.
Hong Kong banks, led by HSBC and BOC Hong Kong, have increased their Hibor-based mortgage rates at least six times since April as liquidity dried up.
Taking Luk's case as an example (see table), a loan of HK$3.1 million repayable over 30 years, at the current prime lending rate less 3.1 per cent, will cost her HK$13,992 a month. A Hibor-linked loan priced at Hibor plus 1.8 per cent will cost her HK$13,936 a month, just HK$56 a month less than a prime-based loan.
But Lau expects Hibor will rise this year - despite the assurances from the US Federal Reserve - because of the uncertain global economic environment. A Hibor-based loan would therefore steadily increase until it hits the rate at which it is capped by banks and the borrower is protected from any further rises. Currently that cap is prime minus 2.35 per cent, translating into an effective rate of 2.88 per cent. Under this rate, Luk's monthly payments would increase to HK$15,402.
Centaline Mortgage Broker managing director Ivy Wong Mei-fung said more clients were now turning to prime-based loans because repayments would be more stable.
Lau of mReferral said that in the long run, prime-based mortgages would offer a more predictable monthly repayment since Hibor rates were unlikely to remain at their present low levels.
'We could see Hibor rising to 3 per cent or more by the end of 2012,' she said.