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Sunday, Sep 25, 2022

Think twice, home buyers urged

Think twice, home buyers urged

Prospective home buyers may need to think twice before making a decision as the accumulated rise in the mortgage loan rate is expected to reach 0.5 per cent by next month.
Major local banks raised the cap of the mortgage rate linked to the Hong Kong interbank offered rate yesterday.

The Hongkong and Shanghai Banking Corporation, which has more than 20 percent market share in providing mortgage loans, has increased the cap by 0.25 percentage points to 2.75 percent.

Standard Chartered Hong Kong has made the same move effective next Wednesday.

More banks are expected to follow as continuous fund outflow caused by the US interest rate increases shrinks the liquidity in the banking sector, pushing the one-month Hibor up to 1.9 percent from just 0.14 percent in January.

While the borrowing costs are increasing, the mortgage rate had been capped 2.5 percent since last month before the rise, stopping lenders from raising the rate to meet costs and squeezing their income.

While the Hibor-based mortgage rate is usually calculated by a floated one-month Hibor plus a fixed rate, such as 1.3 percentage points, the cap is determined by the prime rates minus a figure like 2.5 percentage points.

HSBC, whose prime rate stands at 5 percent, raised the Hibor-based mortgage cap from prime rate minus 2.5 percent to prime rate minus 2.25 percent, which translates to a new cap of 2.75 percent. Its prime-rate mortgage rate also rose to 2.75 percent.

For buyers, the financial burden may be even heavier soon. It is believed the best lending rate may be raised by 0.25 percent next month.

The rate is expected to be raised if the one-month Hibor jumps to 2 percent and the aggregate balance shrinks to below HK$100 billion from the current HK$125 billion, said Ivy Wong, managing director of Centaline Mortgage.

If the prime rate rises, both the mortgage rates based on Hibor and the prime rate would hit 3 percent. On choosing types of home loans, Wong believes the Hibor-linked mortgages will still be more popular, but Sammy Po Siu-ming, chief executive of Midland Realty's residential division, said half of the new buyers may turn to loans based on the prime rate as it is more stable than the Hibor.

For a new homeowner with a 30-year mortgage of HK$5 million, monthly repayments will rise by HK$1,347, or 6.7 percent, after a total increase of 0.5 per cent in mortgage rates, said the chief vice president of mReferral Mortgage Brokerage Services, Eric Tso Tak-ming. He recommends that potential home buyers reserve more funds for the down payment to cope with the risk of rising rates.

To provide some relief to mortgage customers, HSBC also launched a new mortgage plan, allowing homebuyers to pay the interest at a fixed rate of 2.75 percent in the first year before switching to the Hibor-based rate.

Property prices in Hong Kong are expected to drop 2 percent this month amid the rising interest rates. But the rise in mortgage rate cap may not have a big impact as developers and second-hand sellers had expected the increase and already had a low-pricing strategy, said Po.

However, the outlook is gloomier. Goldman Sachs earlier this year forecast home prices will drop by about 20 percent over the next four years.

On the bright side, a cooler-than-expected US consumer inflation report in July has raised expectations of less aggressive interest rate increases from the US Federal Reserve.

Markets are seeing a greater possibility of a 50-basis-point increase in September rather than 75 basis points. But the rise of the cap may still hit the local remortgage market hard, which could damage the overall mortgage business in local banks, said the mortgage referral brokerage firm StarPro Agency.

The number of remortgages is expected to decrease by 40 to 50 percent and overall mortgage numbers will drop by at least 10 percent as the number of remortgages accounted for about one-quarter of the total, said Raymond Chong, chief executive of StarPro Agency.
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