New step may not help banks but it does hurt homebuyers

Increase of 0.25 percentage point in mortgage interest rates would make homes even more unaffordable for struggling families

PUBLISHED : Friday, 15 March, 2013, 12:00am
UPDATED : Friday, 26 January, 2018, 4:12pm

Wednesday's move by HSBC and Standard Chartered to raise the interest rates they charge on new mortgages was no surprise.

Bankers had warned an increase would be inevitable after the Hong Kong Monetary Authority last month ordered them to increase the amount of capital they hold against new residential mortgages to at least 15 per cent of the loans' value.

Considering that Hong Kong's banks had previously set a capital weighting of less than 10 per cent on their mortgage portfolios, the HKMA's move pushes up the capital costs of their mortgage lending significantly.

That cost increase has now been passed on to homebuyers in the form of a 0.25 percentage point mortgage rate increase, pushing the interest rate on a typical new loan up from 2.75 per cent to 3 per cent.

There's a paradox here. The HKMA ordered the city's banks to hold more capital against their mortgage books precisely because it is worried that mortgage rates will rise.

It's a distant prospect. US interest rates, to which Hong Kong's rates are tied, look set to remain at an effective rate of zero for at least the next two years, and to rise only slowly after that.

But as monetary authority boss Norman Chan Tak-lam points out, US rates will certainly go up at some point over the next 25 years, which is the average lifespan of new mortgages in Hong Kong.

And when US rates do rise, Hong Kong mortgage rates will go up in lockstep.

That's going to make servicing their payments difficult for many households. Last month, with the typical mortgage rate at 2.75 per cent, mortgage payments took up half the average household's income, according to Centaline's affordability index.

So if the US Federal Reserve were to increase its Fed funds target rate from 0.25 per cent currently to 3 per cent - a shade below its average over the past 20 years - servicing a home loan would eat up the average family's entire monthly income.

Our average family could be forced to default. And that could inflict a loss on the bank which granted the mortgage, which is what bothers the HKMA.

Whether requiring banks to hold more capital against their mortgage loans will help is doubtful, however.

For one thing, lenders are already supposed to stress-test their mortgage applicants' ability to sustain payments in the event of a steep rise in interest rates.

And for another, the 15 per cent capital requirement will only apply to new loans, not to the banks' existing mortgage books.

But the HKMA's move does have one clear effect. It has already pushed up the interest rates on new mortgages by 0.25 percentage point, which is an increase of almost a tenth.

In other words, the cost to the average family of servicing a new mortgage on a typical flat will climb from 50 per cent of their monthly income to 55 per cent.

That is a painful increase, one sizeable enough to make buying a home of their own even less affordable for many families.

So what the HKMA regards as a prudential move to strengthen bank balance sheets in case of a rise in mortgage rates in the future has had the effect of pushing up mortgage rates in the present, making homes even more unaffordable for struggling families.

Allan Chiang, the privacy commissioner for personal data, yesterday gave a telling insight into why he supports government proposals to conceal the identity card numbers of company directors from public view in the Companies Register.

"The present system is not satisfactory because there is no control," Chiang said. "Anyone who pays HK$22 can obtain the information."

The problem, it seems, is that the public can actually get access to public information in a public registry.