It was recently circulated online that applications for Hang Seng Bank’s fixed-rate mortgage plan would close at the end of July, with no indication that the deadline would be extended. However, it was later confirmed that the application deadline had been extended to 31 August. Fixed-rate mortgages have recently returned to the market spotlight. Do they really help borrowers save on interest?
A fixed-rate mortgage refers to a mortgage under which the bank locks the mortgage rate at a specified level for a designated period. The rate will not change in response to movements in the prime rate (P) or the Hong Kong Interbank Offered Rate (HIBOR). In other words, during the fixed-rate period, both the borrower’s mortgage rate and monthly repayment amount remain unchanged.
At present, several major banks offer fixed-rate mortgage plans. For example, HSBC, Hang Seng Bank and Standard Chartered Bank all provide a three-year fixed-rate option, while HSBC also offers an additional five-year fixed-rate plan, allowing applicants to choose a suitable term according to their own financial arrangements.
Under the current plans, eligible applicants may obtain a mortgage of up to 90% of the property price, with a mortgage rate of 2.73% during the fixed-rate period. After the fixed-rate period ends, the mortgage rate will switch to P-1.75% or P-2%, with the actual rate at around 3.25%.
In addition, to protect their interest income and reduce the number of customers refinancing in the short term, fixed-rate mortgages generally come with a penalty period of two to three years. If a borrower repays all or part of the loan early during the penalty period, refinances the property with another bank, or repays the mortgage early due to the sale of the property, the bank will charge the corresponding penalty interest or handling fee.
So, do fixed-rate mortgages really save more on interest? Based solely on current interest rates, the answer can be said to be yes. The capped rate for a typical H-plan mortgage is currently around 3.25%, while the rate for a fixed-rate mortgage during the fixed-rate period is 2.73%, representing a difference of around 0.52 percentage points. For borrowers, choosing a fixed-rate mortgage allows them to enjoy a lower and stable interest rate for a specified period, thereby reducing their short-term mortgage repayment burden.
Taking a loan amount of HK$5 million with a 30-year repayment term as an example, if the H-plan mortgage rate reaches the capped level of 3.25%, the monthly repayment would be around HK$21,760. If a fixed-rate mortgage at 2.73% is used, the monthly repayment during the fixed-rate period would be around HK$20,359. This means the borrower would pay around HK$1,401 less each month, saving approximately HK$16,812 in total over one year.
However, the above comparison only reflects the difference under current interest-rate levels. Whether it ultimately results in genuine interest savings will still depend on future market interest-rate movements. To a certain extent, this can be described as a wager with the bank on the future direction of interest rates. If the pace of interest-rate cuts in Hong Kong is faster than expected, and mortgage rates even fall below 2.73%, those who originally chose a fixed-rate mortgage would instead be unable to benefit from the rate cuts.Apart from this, borrowers should also pay attention to other conditions when comparing different mortgage plans. Generally speaking, banks’ fixed-rate mortgage plans do not include a Mortgage-Link deposit account, while their cash rebates are also usually lower than those offered under standard H-plan or P-plan mortgages. Some plans may not offer any cash rebate at all. Therefore, these factors must also be taken into account when assessing whether a fixed-rate mortgage is worthwhile.
