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HSBC

HSBC raises Hong Kong prime rate for the first time in a decade, ending era of cheap funds

For a typical HK$4 million, 30-year loan, a 12.5-basis point increment raises the monthly payment by HK$288 to HK$15,556, according to mortgage broker mReferral

PUBLISHED : Thursday, 27 September, 2018, 11:39am
UPDATED : Thursday, 27 September, 2018, 6:59pm

HSBC has become the first commercial bank to raise its prime rate in Hong Kong, taking its cue from the US Federal Reserve and the Hong Kong Monetary Authority in ending a decade of cheap capital.

The base lending rate for borrowers will be raised by 12.5 basis points to 5.125 per cent, from 5 per cent, effective September 28, HSBC said in a statement. The savings rate on local currency deposits will be raised by 12.4 basis points to 0.125 per cent, from 0.001 per cent.

The moves follow a 25-basis point increase in base lending rate overnight by the US Fed, which was mirrored by an increment of the same magnitude by the HKMA.

The base lending rate is the interest the HKMA charges commercial banks, which must closely follow any changes with the US Fed rate to maintain the local currency’s peg to the US dollar.

‘End of era of cheap lending,’ HKMA chief warns as Hong Kong raises base rate

“Hong Kong’s low-rate environment has prevailed for over 10 years now, so it’s inevitable that banks would have to raise rates” following the recent increases in the US, the city’s Financial Secretary Paul Chan Mo-po said today at the Hong Kong Institute of Bankers conference, before HSBC announced its move.

The local monetary authority has raised the base rate eight times since December 2015, three times this year. Still, the city’s commercial banks have kept their base rates unchanged for the past decade to remain competitive, a strategy that has kept Hong Kong flushed with cheap money, fuelling asset prices in equities and property.

“Most banks are reluctant to touch their base lending rates, because the rate is linked to a substantial amount of loans, and any shift would hurt them competitively,” said Gordon Tsui Luen-on, managing director of Hantec Pacific in Hong Kong. “However, eight rounds of interest rate increases over three years have finally forced the banks’ hands.”

The last time Hong Kong’s major lenders raised their base rate was on March 30, 2006, when HSBC raised the rate to 8 per cent from 7.75 per cent.

US Federal Reserve raises interest rates – and says more is coming

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. Some smaller banks have kept their base lending at 5.25 per cent since.

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.

Borrowers who tie their mortgages to the prime rate will face higher payments when the move kicks in. For a typical HK$4 million, 30-year loan priced at prime minus 2.75 per cent, a 12.5-basis point increment increases the mortgage to 2.375 per cent, raising the monthly payment by HK$288 to HK$15,556, according to mReferral, a mortgage broker in the city.

Higher interest rates “pose high risk to Hong Kong’s asset market,” the financial secretary Chan said. “I urge investors to exercise caution in their investments, because of the higher interest rate burden, the uncertainties brought on by the US-China trade conflict, and external uncertainties related to the emerging markets.”


With additional reporting by Georgina Lee in Hong Kong

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