HIBOR hike likely to trigger mortgage lending rates

Interest rate

Recently, mortgage loan interest rates are mostly a one-month Hong Kong Interbank Offered Rate (HIBOR), plus 1.3 to 1.4 percentage points. However, starting in late November, the one-month HIBOR has risen from the mid year percentage point of 0.3% to over 1%, hitting a nine-year high and reaching the capped rate linked to the banks’ prime lending rate. Whether there will subsequently be an increase in the prime rate has become a hot topic.

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According to past experiences, interest rates tend to rise towards the end of the year and usually fall back down after the New Year. Will 2017 follow the same cycle? It is projected that the U.S. Federal interest rate will increase in mid-December, and continue to increase three to four times in 2018. As Jerome Powell is set to be the new chair of the US Federal Reserve, it is unclear whether there will be policies that come with this new leadership. In addition, now that the U.S. Senate has passed the tax reform bill, how will this affect businesses and funds in the U.S., and what will happen to the excess capital held by Hong Kong banks?

Of course, rate hikes in the U.S. are not completely reflected in Hong Kong. With the HIBOR going up, HSBC swiftly responded saying that as there is HK$229.3 billion of capital available in the Hong Kong banking system, it is unlikely that interest rates will increase in the first half of 2018. This view was echoed by Standard Chartered, who said that there will have to be an at least a three-point difference between prime rate and the HIBOR before an interest rate hike is considered. Obviously, major banks are in possession of large quantities of capital, which they lend out to smaller banks through the interbank market, therefore they benefit from HIBOR hikes and have all the motives to keep the prime rate status quo. Currently, Hong Kong has HK$12 trillion held as deposit and only HK$800 million in loans, so it is understandable why major banks are conservative with rate increases.

I suggest readers to keep a close eye on the balance of the bank system. If it gets lower than HK$10 billion, or if the HIBOR rises to nearly 2%, there is a big chance for the prime rate to increase. Elevated prime rates will have an impact on most homeowners. However, with stringent cooling measures, low mortgage rates and pressure tests in place, it won’t be a big problem for usual mortgagors. On the other hand, there are developers offering properties with high mortgage rates that requires very low financial strength but high interest rates. If there is a hike in prime rates, the increased interest rate can easily throw buyers off balance. Plus, as the down payment percentage is low, if property prices are on the down, these homes are at a huge risk of being in negative equity. So, when you are considering purchasing real estate, pay close attention to interest rate fluctuations and how they can affect your mortgage. 

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