Hang Seng Bank has chosen to take the high road in this year's tax-loan market with a product which charges a floating interest rate benchmarked against prime.
Those opting for a floating interest rate option will be charged at the prime rate plus 1.5 per cent for a 12-month loan of HK$100,000. This equates to an annualised percentage rate (APR) of 8.7 per cent based on the current prime of about 5 per cent. Fixed rate loans attract an APR of about 10.09 per cent.
Tax loans are regarded industry-wide as a cut-throat market with aggressive banks offering loans of typically just over 5 per cent for borrowing HK$100,000.
Banks, especially the smaller competitors that have to raise funds for the unsecured loans on the money market, have to make do with razor-thin margins only 2 to 3 per cent.
With fixed interest rates, banks would earn a higher or lower profit margin depending on how interest rates - and especially interbank interest rates - moved. The risks here are borne by the bank.
With a floating interest rate loan, risks associated with interest-rate fluctuations are carried by the consumer in return for paying lower interest rates initially.
'The rates that we charge are basically a function of the risk that we run. With a floating rate . . . the spread that the bank will take will remain constant,' said William Leung, deputy general manager of Hang Seng bank.