In the past two weeks the Hang Seng, Standard Chartered and Wing Lung banks effectively raised the margin they impose on mortgages priced against the Hong Kong interbank offered rate (Hibor).
While Hibor has traditionally been the benchmark for the Hong Kong dollar wholesale market, such as syndicated loans, it has become popular in the past year for mortgage plans when it dipped. Some Hong Kong mortgages are also priced against the prime rate, which is a favoured retail benchmark for products such as personal loans and tax.
Citibank and Bank of East Asia confirmed they would follow the trend of lifting the margin for Hibor mortgages, but HSBC said it would pay close attention to the market before it made a decision.
Citibank plans to increase the interest rate of Hibor mortgages to Hibor plus 0.8% to 1% within the next two weeks. The bank offers rates at Hibor plus 0.7%.
Hong Kong people usually have two options to choose from when applying for a mortgage: they can select the Hibor-based product, or one based on the prime rate, which is also known as the best lending rate.
In the past 12 months, home buyers have increasingly preferred Hibor mortgage plans over prime-based mortgages, because Hibor products have been cheaper.
The average rate for the three-month Hibor, which is often used as a benchmark as opposed to the one-month and six-month Hibor, was 0.25% this year, down 0.2% compared to 2009.
The prime rate differs for every bank, but is more stable, while Hibor changes every day based on the liquidity in the market. While Hibor-based mortgages are lower than prime-based mortgages in the short term, they could carry greater risk and volatility in the longer term.
Banks said that the margin for Hibor-based mortgages had been very low in recent months and they were hardly making money on the loans.
"We face cut-throat pricing in this market," said Lawrence Lam Chi-kong, Citibank director of sales and secured lending business. "The rise can help our bottom line."
When the financial crisis hit, banks saw a huge dip in commercial lending to companies in Hong Kong, and mortgage lending seemed to be the safer bet, so they lowered their Hibor-based mortgages to compete for business.
"Now that the economy is picking up, banks have more options than just mortgage lending and we are seeing a rise," said George Leung, HSBC's Asia-Pacific adviser on strategy and economics.
Banks said there was no mass move from Hibor mortgage plans to prime-based among mortgage applicants after the announcement.
"Even after the three banks raised the mortgage rate to around Hibor plus 0.8%, it is still a low margin for banks, as the usual rate is at least 1% above the Hibor," Leung said.
Banks could still afford to keep Hibor mortgage plan interest rates low because most still had abundant liquidity, Leung said.
Last week's announcement by the US Federal Reserve — its second round of quantitative easing — could see an influx of money into Hong Kong's already liquid market as worldwide investors remain bullish on Asian markets. — South China Morning Post
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