Bankers yesterday expressed apprehension over a Hong Kong Monetary Authority proposal to create an index for mortgage lending, replacing the 40-year-old industry practice of using the prime rate as the basis for home loans. Many worry the change may create confusion among customers and cause technical problems that will be expensive to resolve. HKMA chief executive Joseph Yam Chi-kwong said informal consultations with the banking sector had been held in recent months over a proposal to create a composite average funding cost index for mortgage lending. Banks would use the same index, adding a premium to suit market conditions. Mr Yam said the index would be based on the average of all funding costs, including interest paid on savings deposits, interbank lending and other sources of funding. 'Traditionally, mortgage rates are based on the prime rate. However, since the markets have different prime rates at the moment, it has made it difficult for customers to compare mortgage rates.' HSBC, Hang Seng Bank and Bank of China (Hong Kong) have set their prime rates at 5.75 per cent, while other banks have set theirs at 6 per cent. Chan Tze-ching, Citigroup's Hong Kong and Taiwan country officer, disagreed with the proposal. 'Creating a new benchmark index will only add confusion to the markets,' he said. 'The prime rate has been accepted in the mortgage markets for decades and there are no customer complaints about it.' Mr Chan suggested the HKMA standardise the existing prime rate and allow banks to charge different spreads on top. Stanley Wong Yuen-fai, a deputy general manager at Industrial and Commercial Bank of China (Asia), said the technical problem of developing and integrating a new index could prove daunting. 'Each bank has its own funding costs and it would be hard to generate a single index to fit all,' he said. 'Also, the cost of funding changes every day. Would that mean mortgage rates would be updated daily?' He also said there were more than $600 billion worth of outstanding mortgage loans, almost all priced based on the prime rate. 'Existing customers may not want to change the terms of their mortgages,' he added. HKMA deputy chief executive Peter Pang Sing-tong said that while concerns were warranted, the risks would be low. 'Of course, consumers and banks have to be educated, but it doesn't take a rocket scientist to understand it. It's just a reference point for setting the price,' Mr Pang said. He said the new index would increase the stability of prevailing rates, which the HKMA suggested would only be adjusted when the index rose substantially.