As rates rise over the next few years, so will adjustable rate mortgages and, in turn, so will mortgage carrying costs. The shifting dynamics of a mortgage in a rising interest rate environment should draw borrowers’ attention to two key points of concern. 

The first point is that if interest rates increase over the next few years to, say, 7.5 per cent, then the annual carrying cost of a mortgage increases by a massive 70 per cent. The second point is that as interest rates increase, the amount of a monthly payment applied to principal shrinks to only 20 per cent of that payment. In other words, if rates rise to 7.5 per cent, interest expense will consume 80 per cent of a mortgage payment. Debt reduction has now slowed to unsustainable levels. 

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

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As we know, rates can rise and fall very fast. As household borrowing costs increase, and a fixed-rate teaser period shifts to a floating rate, bank deposits fall and banks’ access to cheap liquidity diminishes – contributing to higher interest rates. 

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Next, borrowers cannot afford their mortgage payments and start selling. The supply of secondary properties increases, depressing prices. Mortgages become higher than the value of the property, further accelerating the desire to sell and increasing supply.