Explainer: What Hong Kong’s interest rate increase means for Hibor, prime and mortgages

Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, today raised its base lending rate for the third time this year following a similar move by the US Federal Reserve, increasing it by 25 basis points to 1.75 per cent.

What is the base lending rate?

It is the interest that banks pay on money they borrow from the Hong Kong Monetary Authority. Individuals or companies do not borrow money at this rate.

How do higher base lending rates affect mortgage rates in Hong Kong?

It doesn’t have a direct effect as almost all mortgage rates are either linked to Hibor (the Hong Kong Interbank Offered Rate), or linked to prime rates, which are set by banks. The city’s biggest lenders

such as HSBC, Bank of China (Hong Kong), and Hang Seng Bank have a prime rate of 5 per cent. Standard Chartered and Bank of East Asia set their prime rate of 5.25 per cent.

How are Hong Kong’s mortgage rates priced?

Two options are available:

1). Hibor plus a percentage (the best advertised rates are normally 1.3 per cent), or

2). Prime minus a percentage (the best advertised rates are around 2.85 per cent, or 3.1 per cent, depending on which prime rate a bank uses).

What’s the advantage or pitfall of each option?

Hong Kong’s banks have not changed their prime rates since the 2008 global financial crisis, but Hibor changes every day, as it reflects the interest rates banks charge other banks.

As the base rate rises, and banks have to pay more to borrow from the HKMA, it’s fair to expect banks to charge each other higher rates.

However, even though Hong Kong’s base lending rate were raised in December 2016, March 2017 and June 2017, the Hibor remained low. Then in October it started to go up, and in recent weeks it has hovered at around 1 per cent, its highest level since the global financial crisis.

Read: Hong Kong raises base rate by 25 basis points in lockstep with US Fed’s third increase this year

As Hibor rises, do mortgage payments get more expensive?

Yes, up to a point. However, most borrowers’ Hibor-linked mortgages include a clause which says that if their repayments are greater than they would be on a prime mortgage, they automatically switch to a prime-based payment scheme. We have now reached that point, so repayments have not risen that much.

Hibor (about 1 per cent) + 1.3 per cent = 2.3 per cent.

Prime - 3.1 per cent = 2.15 per cent.

When will the banks raise their prime rates?

It is up to them, but most analysts expect it will happen early in 2018. As Hibor rises, banks that do not have large deposit bases have to pay more for their cash, and so need to charge higher rates to maintain margins at the level they like.

So far, a combination of low Hibor, and fierce competition between Hong Kong’s banks has kept mortgage repayments low. However, as Hibor rises, the pressure is building on banks to raise their rates.