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Finance Mortgage
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Interest rates
All mortgages in Hong Kong are offered on 'floating rates'. However, in the global mortgage market, things are more flexible. Read on to understand your options. |
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1. What is HIBOR?
Interest rates in Asia are based around HIBOR which stands for Hong Kong Inter Bank Rate, or the Prime Rate. HIBOR is the underlying rate and Prime is typically the ceiling rate. Dependent on your status and economic conditions, banks will either offer you Prime Rate minus a percentage (typically between two and three per cent) or HIBOR plus a margin (typically between 0.5 and one per cent).
Currently the cheapest form of borrowing in Hong Kong is HIBOR plus a margin which can easily be affected by a global rise in interest rates, something that we are currently experiencing. |
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2. Variable rates
All mortgages in Hong Kong are offered on ‘floating rates,’ known internationally as the ‘variable rate,’ so as interest rates rise so do your payments. Most Hong Kong property owners reading this will certainly know what we are talking about as they experienced 16 consecutive interest rate hikes between 2003 and 2006!
Thankfully in an attempt to maintain market confidence, rates have been relaxed over the last six months. Even in today’s competitive mortgage market it is unusual for banks to come back to their clients and offer them a better rate even though rates have been reduced, it is therefore up to the client to either regularly renegotiate their rate with their lender or go through the expense of refinancing and moving the loan to another lender offering a more competitive rate. |
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3. Interest only basis
In the global mortgage market, things are more flexible and even different types of payment option are available. As well as the traditional Principal and Interest mortgage you now have the option of borrowing on an Interest Only basis.
This is generally recognised as a much cheaper way of borrowing money as you are only servicing the debt rather than repaying it. Borrowers can look outside to other asset classes and ways of repaying the loan if they wish to do so but banks no longer insist upon this. |
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4. Fixed rate
Dependent upon personal circumstances, attitude to risk and anticipated interest rates, you can choose a fixed-rate based mortgage. This type of mortgage fixes the interest rate for a certain period of time, generally between one and five years. Client can take comfort from the fact that if they can afford their repayments today then they can continue to do so over the fixed period. The downside of a fixed-rate mortgage is that if interest rates drop significantly below the fixed rate then the clients will effectively be overpaying the market rate. |
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5. Discounted rate
The discounted rate is another type of mortgage whereby the lender will ‘entice’ the borrower through their doors by offering a discount off the standard variable rate, this discount is generally for a period of one to two years after which the client goes onto the standard variable rate. |
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6. Tracker rate
Another offering from the bank will be a Tracker rate whereby the interest that you pay tracks a particular index so that as interest rates move up or down so does your pay rate. An example of this would be the UK where over the last 10 years the UK base rate has gone from a high of seven per cent in 1997 steadily down to 3.5 per cent in 2003 only for a tightening of policy to the present day where the rate is 5.5 per cent. The difference that these swings make to a borrower with a GBP150,000 is as much as GBP437 per month. |
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7. Currency mortgage
Another type of mortgage that has become very popular over the last five years is the currency mortgage, whereby certain large international banks now allow clients the freedom and flexibility of borrowing in other currencies which allow the borrower to seek out lower interest rates than that of his base currency. The necessity to constantly move from bank to bank to seek out better deals is now removed as there is a basket of currencies to choose from with varying interest rates. These banks allow clients to switch between currencies on a quarterly basis without charge and seek out lower interest rate opportunities, which can also reduce the size of the mortgage if exchange rates have worked in your favour. It is important when entering into this type of mortgage that correct attention is also paid to the relationship between the currencies both at inception and on an ongoing basis, and like any other investment it needs to be monitored on a regular basis. |
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