The Hong Kong Monetary Authority has issued a letter to SAR banks warning them against excessive competition in the mortgage refinancing business. The move followed a sharp increase in refinancing loans last month which reached 35.6 per cent of total approved new home loans, compared with 25.6 per cent in August. Last month, new home loans declined 8.7 per cent to $8.9 billion from $9.7 billion in August. Banks have been fiercely competing in the mortgage market amid a dearth of new business coming into the sector as a whole. In the letter to the banks, HKMA deputy chief executive David Carse said this level of competition would lead to a 'merry-go-round' effect where mortgages circulate around the system with an ever decreasing return. This activity in the home-loans market has been seen as a threat to the stability of the banking system. Benefits such as cash rebates and lower interest rates are common strategies being used to entice customers to switch their mortgage loans between banks. Mr Carse said refinancing loans averaged 3 per cent of total new loans for the housing market last year - a marked contrast to last month's level of 35.6 per cent. He stressed his letter should not be interpreted as intervention in the market. 'The HKMA supports free competition and is of the view that the strategy for mortgage business is a commercial decision for banks themselves,' he said. The Hong Kong Association of Banks chairman, Liu Jinbao, said the association, representing all SAR banks, had reached a consensus with the HKMA. Banks reserve the right to develop their own home-loan strategies but will review the commercial viability of strategies if they fail to bring in new businesses to the sector. Mr Carse said they should also adhere strictly to the 70 per cent loan-to-value ratio lending ceiling on both new loans and refinancing loans. For refinancing in particular, banks should calculate the loan amount based on the latest objective valuation of the underlying property, the HKMA offical said. Banks should also explain to customers the costs and benefits of switching loans from one institution to another, Mr Carse said. Liu Chong Hing Bank executive director Nam Lee-yick forecast that refinancing activities would soon cool down because there were fewer mortgages eligible for refinancing and limited scope for banks to continue cutting their rates.