A MORTGAGE war has broken out in Hong Kong. In the face of a progressive slowdown in growth of new residential lending business, banks have been firing off a barrage of special incentives in a bid to drum up more business. 'If you can't beat them, join them' has been the spirit as a succession of banks - big, medium and small - have one after another moved to cut mortgage rates for different market groups. Competition is being stepped up in Hong Kong's tough residential mortgage market. With bad times in the residential property market, banks in May and June began aggressive marketing campaigns to entice borrowers. Bells and whistle incentives were being offered to lower the cost of taking out a mortgage and to cut the amount of deposit to be put down on a deal. Now it is Mortgage Wars II, the sequel. Hongkong Bank fired the first shot a little more than a week ago, slicing between a quarter and half a percentage point off its mortgage lending rate to favoured new customers. Instead of the normal 175 basis points above the prime lending rate, privileged customers would be charged 125 basis points or 150 basis points on their mortgages, at the discretion of their bank manager. With prime interest rates at nine per cent, the customer would have to pay 10.25 or 10.50 per cent a year instead of the standard 1.75 per cent extra levied on its existing customers. Hang Seng Bank then entered the ring, dropping its margins by a quarter of a percentage point for professionals and most regular bank customers, and offering discounts of up to one per cent to many civil servants. Smaller banks soon began to offer their own special incentive packages, even at the cost of shaving their margins. Hongkong Bank and Hang Seng Bank dominate the Hong Kong mortgage lending business with 60 per cent of the market. Besides declaring cuts in lending rates, ranging from a quarter of a percentage point to one per cent, smaller banks have been offering other incentives such as renovation loans and cash bonuses. While potential flat buyers find themselves in a win-win situation, those who took mortgage loans earlier must be kicking themselves, unable to qualify for the discounts now being offered to first-time flat buyers. For banks, this is a step towards enhancing their mortgage lending business in a lacklustre property market. A recent residential mortgage survey showed a decline of 13.5 per cent in banks' monthly mortgage loans from June. The Hong Kong Monetary Authority's monthly survey showed gross loans made by the 33 financial institutions fell to $7.6 billion from $8.7 billion in June. While new flat buyers will accept the cuts with open arms, it is probably too soon to tell whether the incentives will be sufficient to revive Hong Kong's depressed property market. Banks are unlikely to make an across the board cut in margins. Big brother Hongkong Bank views its rate cut move as a 'special offer' to the favoured few. 'We are not reducing our mortgage rates,' maintained a bank spokesman. 'We are just offering inducements to corner more mortgage business.' Hongkong Bank's offer is limited to those it refers to as 'customers of good standing and had been banking with the bank for six months'. Hang Seng Bank's preferential mortgage lending package is targeted at what it defines as professional and people holding certain key accounts with the bank, or owners of companies that use Hang Seng bank as their principal bank. Civil servants on high-level pay scales are singled out for even more special treatment. Shortly after Hongkong and Hang Seng banks announced their offers, Standard Chartered Bank, the territory's third largest mortgage lender, moved to reduce its rate by a quarter of a percentage point for all new customers, with no conditions attached. Besides, Standard Chartered's priority banking customers with an average of $500,000 in the accounts are offered a discount of half a percentage point on the mortgage rates. First Pacific Bank entered the fray, saying anyone who could produce proof of income and tax returns would enjoy a quarter of a percentage point cut on the standard rate. It said flat buyers could get another quarter of a percentage point discount, depending on the location of their flat and if monthly repayments did not exceed 40 per cent of their household income. Bank of East Asia offers preferential terms with reductions up to one per cent. Other bonuses included decoration loans and pre-approved credit cards with a waived annual fee for the first year. Other financial institutions are still reviewing their policies. While ABN-AMRO Bank will review its policy on whether to follow suit, Bank of America (Asia) said it would cut rates by a quarter of a percentage point but had not decided whether it would be across the board or in specific markets. Analysts attributed the latest chain of developments to the lack of activity in the property market. JCG Finance deputy manager Chan Hoi-wan expected the latest developments to put pressure on the Hong Kong Monetary Authority to review its policy on mortgage rates. He said pressure was mounting on banks and the monetary authority to relax the ceiling on the mortgage loans banks could lend out.