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With interest rates set to rise, homebuyers should think carefully about how they will manage their mortgage repayments

Hong Kong's interest rates face upward pressure because the dollar is pegged to the greenback.

Therefore, homebuyers should look carefully at their financial health and find ways to minimise their interest expenses.

History tells us an interest rate cycle will last several years. So a careful financial plan is needed.

To predict future interest rate trends, we should look at Hong Kong's last rising interest rate period, which started in 1992 with a prime rate of 6.5 per cent. It rose to 10.25 per cent in 1998 before the economic crisis pushed it down.

The prime rate is now 5 per cent, still below the level in 1992.

Assuming the next interest rate trend follows the last one, I suggest there will be an average 1 per cent interest rate increase each year for the next five to six years.

How will it affect the mortgage lending rate? The table shows the mortgage rate will rise 7 to 9 per cent  per year for a $1 million mortgage loan. That is based on the assumption that banks sustain the present mortgage loan pricing of 2.75 per cent below prime, (that is, an annual rate 2.25 per cent) for a loan tenure of 20 years.

To minimise the interest expense, existing mortgage borrowers might consider shifting their loans to other banks offering lower rates (floating or fixed) whenever possible.

But total expenses of the refinancing need to be calculated carefully, while any limitation for future changes to mortgage loans should be considered.

The 'earn more, spend less' strategy is recommended for all existing mortgage borrowers to deal with rising interest rates. They should forecast their future incomes and ensure that future increases in monthly instalments will be covered by salary increments.

Given that half of a borrower's monthly salary is set aside for the mortgage repayment, a homeowner needs a rise in salary of at least 4.5 per cent per year to maintain the same standard of living.

Borrowers who are less confident of ascertaining sufficient income should consider taking part-time jobs, or spending less on non-essential items.

Avoiding deluxe holidays by joining cheaper package deals is  a good way to minimise expenses.

To avoid additional financial burdens, consider lowering the mortgage loan amount, or repaying principal as soon as possible.

The recently popular 95 per cent mortgage loan programme among first-time buyers is not recommended because higher interest payment is required compared with other financing methods such as a 70 per cent mortgage payment.

If a borrower does not have stable income, consider a cheaper flat which will still be affordable if interest rates rise.

When interest rates increase, more interest expenses will be incurred when the principal is later deducted. I suggest that borrowers, whenever possible, should not choose mortgage plans that delay payment of interest and/or principal.

Those who want a flat or have mortgaged their homes should consider that the prime rate will increase by 1 per cent, so they should budget for larger repayment expenses for the mortgage loan.

Hendrick Leung is a director of Ricacorp Mortgage Agency



Borrowers must shore up for the future