Low funding costs in the interbank money market have led to more aggressive mortgage pricing strategies by small and medium-sized banks, market watchers say. CLSA banking analyst Dominic Chan said the persistent low level of the Hong Kong interbank offered rate (Hibor) meant that banks with fewer retail deposits would find it cheaper to fund their lending through interbank borrowing. 'Lately, there has been more money coming into the system because of the expected liberalisation of the yuan. With the aggregate balance going up again, smaller banks are finding it less costly to borrow in the money market,' he said. His comments came as competition for mortgage business appeared to have spread to the secondary market of properties bought under the now-defunct Home Ownership Scheme (HOS). Hang Seng Bank and HSBC earlier this month lowered interest rates on HOS mortgages to prime minus 2.75 per cent points from prime minus 2.5 percentage points. Smaller rivals such as Wing Lung Bank and Wing Hang Bank also reduced rates on the scheme to prime minus 2.8 percentage points. The HOS was halted in 2002. Loans made under the scheme now take up about 13 per cent of the industry's mortgage loans and 4 per cent of the banks' loan portfolios. Mr Chan said smaller banks would find it hard to sustain the low pricing strategy once money started to flow out of the system. 'Judging from last year's experience, [the outflow] might take place around March next year,' he said. DBS Bank managing director and head of consumer banking Sunny Cheung Yiu-tong said banks could be forced to raise mortgage rates when Hibor began to deviate from the present near-zero level.