Hibor-based plans offer better rates in short term

HONG KONG: Homebuyers have turned in large numbers to funding their purchases with loans based on interest rates in the Hong Kong interbank offered rate market (Hibor) because of the lower borrowing costs they offer — at least in the short term.

Data from the Hong Kong Monetary Authority shows that 82.7% of new mortgage loans approved in May were priced with reference to Hibor — the wholesale money market on which banks raise their funding — up from 31.9% a year ago.

Only 16% of new mortgage loans approved were priced with reference to best lending rates, at premiums ranging from 2 to 2.5%.

Homebuyers were attracted to Hibor products offered by banks because of the lower mortgage repayment costs in the short term, Hendrick Leung Lee-chung, a director and general manager at Centaline Finance, said.

Interest rates on Hibor-based mortgage plans are usually one-month Hibor plus 0.7 of a percentage point. Currently that translates into an effective rate on a home loan of as low as 0.96% based on the one-month Hibor of 0.26% on Tuesday, July 20.

That compares with loan charges on traditional best lending rate or "prime rate" products of 3 percentage points to 3.25 percentage points below the prime rates of 5% to 5.25%.

Since Hibor is a floating rate, and it exposes borrowers to the risk of a possibly sharp rise in borrowing costs, lenders offer a "cap" on borrowing costs that presently ranges from 2.7 percentage points to 2.85 percentage points below the prime lending rate.

The HKMA, which regulates bank lending practices, recommended in March that banks maintain a premium of at least 0.7 percentage points above Hibor, after Hong Kong's largest lender, HSBC, marketed the lowest mortgage rate on offer, based on a premium of 0.65 percentage points above Hibor.

The authority was concerned that a mortgage price war would put smaller banks at risk.

Ivy Wong Mei-fung, managing director of Centaline Mortgage Broker, said competition for mortgage business among lenders had now extended to caps offered on rates, rebates and penalty periods, since the mortgage rate itself was unlikely to be cut further. "In the first quarter, banks would offer a rebate of 0.5%. Now they offer 0.8%," Wong said. "Some of the banks have shortened the penalty period from three years to two years."

The penalty period is the duration of time within which borrowers have to pay more to the bank if they fully or partially repay the mortgage loan.

Frances Cheung, a senior strategist at Credit Agricole Corporate and Investment Bank, believes the prime rate is unlikely to increase in the next 12 months.

"We expect three-month Hibor will rise to 0.6% by the end of this year from the current 0.4%. Hibor may rise to 1.12% by the middle of next year," she said.

Ivy Wong expects interest rates will remain at current levels until the year-end but may then begin to rise.

Hibor-based mortgage plans could help reduce borrowing costs in the short term, as the mortgage rate is 1% less than under the prime rate plan, she said.

"Even if Hibor were to rise, it would not rise higher than the prime rate. Also, since most homebuyers would not hold the properties as long as 10 to 20 years, they could save from a Hibor-based plan," she said.

Leung of Centaline Finance expects Hibor to remain at low levels in the next one to two years. "If homebuyers are looking at a three- to five-year investment period, they should consider Hibor-based plans because their monthly borrowing costs will be lower," he said.

However, if they plan to hold their properties for more than five years, they should consider the traditional mortgage plan, Leung said.

"In the long term, the total mortgage expenditure of the prime rate plan would be less than in a Hibor-based plan. The current prime rate plan is very attractive," he said.  — South China Morning Post