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Hong Kong Monetary Authority (HKMA)

Hong Kong homebuyers’ first mortgage rate increase in 12 years may come as early as September

Banks are seeing their own funding costs rise and are likely to pass this on to their customers for the first time since 2006

PUBLISHED : Monday, 06 August, 2018, 9:01am
UPDATED : Monday, 06 August, 2018, 12:08pm

Hong Kong banks may increase lending rates for the first time in 12 years as early as September, meaning bad news for the city’s home mortgage borrowers and credit card holders as well as for companies with heavy debt loads.

Their cue would come from a rise in US interest rates by the Federal Reserve, which analysts see as more likely following increasing signs of strength in the US economy. Hong Kong’s Monetary Authority is obliged to follow US rate changes to maintain the Hong Kong dollar’s peg to the US currency, but banks have not passed on such rises to customers in recent years.

Now however, banks face rising costs of their own as the plentiful funds that have flowed into the city in recent years, particularly from mainland China, are increasingly moving to the US where the prospects of better returns are greater. That means banks’ customers are likely to have to pay up in the form of higher interest rates.

“The era of cheap funding has come to an end. Companies and individuals will need to prepare for much higher funding costs from September onwards,” said Martin Lam, chief analyst for the Asia-Pacific at currency investment firm ATFX.

Hong Kong homebuyers have a total of HK$1.258 trillion (US$163 billion) in outstanding mortgage loans with banks as of the end of June, with the average size of a mortgage at HK$4.08 million, according to data from the Monetary Authority.

Should rates rise by 0.25 per cent, that would translate into only between a few hundred dollars and HK$1,000 extra per month, depending on the size of the loan, but Lam noted that the Fed has predicted rates would further rise by 0.25 per cent in December and four more times next year. “Borrowers will start to feel the pain then,” Lam said.

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The HKMA increased the official base rate in June by 25 basis points to 2.25 per cent, the seventh time it has done so since December 2015. Commercial banks have not changed their interest rates at all during the sequence of rises. HSBC’s best lending rate is currently 5 per cent while those of other lenders range between 5 and 5.25 per cent.

The last time HSBC increased its best lending rate was March 30, 2006, when it went from 7.75 per cent to 8 per cent. That was then followed by a series of rate cuts, with HSBC’s last cut almost a decade ago on November 10, 2008, when it lowered the rate by 25 basis points to the current level of 5 per cent.

Borrowers from Hong Kong’s smaller banks are likely to see rises first, as smaller banks do not have the resources of global giants like HSBC.

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Mary Huen Wai-yi, chief executive of Standard Chartered Bank in Hong Kong, said the Hong Kong interbank offered rate, or Hibor – the rate at which banks lend to each other – would stay at a high level, meaning that there would be pressure for banks to increase lending rates by the end of this year.

But she did not see the loan business as being very badly affected.

The long-term economic foundations of Hong Kong and mainland China still point to good growth. This would support loan growth in the second half of this year and in the next few years,” she said.

Robert Lee Wai-wang, executive director of Hong Kong-based broker Grand Finance Group, saw a silver lining for stock investors in any rate rises.

“An interest rate rise would be bad news for companies with a lot of debt, but the biggest winners would be stocks in banks, insurance and financial companies.”

Hong Kong dollar is pegged with the US currency which means the local city need to follow the US interest rate movement.