Mortgage rates to climb on rising costsNarrowing spread with the interbank market puts pressure on the smaller players The rising cost to banks of funding customer home loans will force lenders to begin raising mortgage rates soon, Liu Chong Hing Bank senior manager Brian Cheung Nam-chung said yesterday. The industry standard of making home loans at prime rate (5.25 per cent) minus 2.775 percentage points was under pressure from rising interest rates on the interbank market, Mr Cheung warned. 'Based on the prevailing situation, a rate of 2.2 percentage points below prime will be more reasonable,' he said. As a small bank, Liu Chong Hing would not take the initiative and change its rate, which for now remains at prime minus 2.775 points, he said. But this was expected to change in the next three to six months, as banks adjusted their rates in line with the rising cost of funds on the interbank market - where the benchmark three-month Hong Kong interbank offered rate (Hibor) was yesterday quoted at 2.64 per cent, up from just 1 per cent at the start of last month. Rates have surged in a delayed reaction to rising US interest rates and the outflow of 'hot money' from Hong Kong as speculators withdraw their bets that China will soon revalue the yuan. Reports that HSBC Holdings had ceased lending into the interbank market from yesterday also helped lift rates. An HSBC spokesman denied the reports. Several wire agencies reported yesterday that Liu Chong Hing, along with Wing Hang Bank and DBS Bank, had begun raising their rates. All denied they had done so. But ICBC (Asia) director and deputy general manager Stanley Wong Yuen-fai said yesterday his bank was reviewing market conditions with a view to raising rates. 'We are likely to revise our base line standard mortgage rate to take effect probably immediately after the Easter holidays,' Mr Wong said. Big deposit banks such as HSBC, Bank of China, Hang Seng Bank and Standard Chartered fund their mortgages from low-cost customer deposits but smaller banks must raise money from the interbank market, where the 'spread' between mortgage lending rates and the cost of funds has narrowed sharply in recent weeks. Nonetheless, the city's smallest lender, Asia Commercial Bank, would continue to offer mortgages at prime minus 2.8 percentage points, said Tenny Ng, the head of branch banking. 'Our funding cost is higher than large banks, but we want to maintain our customer base and we want our customers to know we care for them,' Mr Ng said. 'Even though the spread is now so narrow, we can still make a profit, no matter how thin.' Property agents said talk of rising mortgage rates had triggered some concern among buyers, but they did not think sentiment would be affected severely. 'Buyers still have plenty of choices since a lot of big lenders are still offering 2.7 percentage points below prime,' Centaline Property Agency Tseung Kwan O branch manager Sunny So Hok-lun said. Mr So noted the negotiation process between buyers and sellers had become longer over the past two weeks due largely to jitters on rate increases. Midland Realty (Holdings) regional sales director of East Kowloon and Whampoa Jim Fung King-wong said most sellers were still reluctant to cut prices despite the rising mortgage rate. But he added that rising mortgage rates could slow the sales of low-priced flats of less than $3 million, since most buyers in that segment were first-time homeowners who were more sensitive to monthly mortgage payments. Dao Heng Securities research head Eric Yuen Chi-fung said mortgage rates alone were no longer such a critical factor in a home-buying decision, and noted that at about 2.5 per cent, rates now were still affordable for buyers, compared with an average rate of 10 per cent during the mid-1990s. 'Since rates are already so low, the market will comfortably weather a 100-basis-point interest-rate rise without dampening sentiment,' Mr Yuen said.