A must-read for mortgagors
Mar 28, 2023
A must-read for mortgagors Hong Kong
  • City News
  • Mortgage repayments
  • mortgage plans
  • mortgage burden
  • secondary property prices
Abstract: "Interest rate hike" is always a nightmare for property owners in the mortgage market. This is why it is sometimes described as the "interest rate demon" in the financial sector.

The US Federal Reserve has raised interest rates several times since the end of 2015, and most of the banks in Hong Kong have stayed put during the several rate hikes in the US and have not followed suit.


Indeed, the Hong Kong banking system has long been well capitalised, with deposits from customers being the main source of funding for retail banks. The abundance of bank deposits has enabled them to keep their funding costs at a low level, and they are in a position not to follow the US interest rate hikes in absolute terms, so interest rates have remained low in recent years.


When banks raise the prime rate, the mortgage plans of mortgagors are linked to that rate, the so-called P mortgage, and the burden of mortgage payments will naturally increase. Both prime rates have remained unchanged since late 2008.


Not much chance of another rate hike in 2023?


In March 2023, the US Federal Reserve announced the latest interest rate results, and as expected, the market raised interest rates by 0.25%. It is worth noting that the US raised interest rates by 0.75% each time for four consecutive times from June to November 2022, and the rate hike was narrowed to 0.5% in December 2022, and only 0.25% each time in early February 2023 and this time.


It is believed that the pace of interest rate hikes in the US will continue to slow down and even peak soon in order to stabilise the local banking system. In Hong Kong, large banks in Hong Kong did not follow the interest rate hike in early February, and the prime rate was also kept unchanged this time.


As a matter of fact, some major banks in Hong Kong have already lowered their H-mortgage cap rates for second-hand properties, and it is believed that interest rates in Hong Kong will not rise significantly in the future. Therefore, according to market estimates, the chance of interest rate hike in 2023 is still low. With the low interest rate environment, it is believed that the impact on Hong Kong's property market will not be significant.


In fact, Hong Kong has a linked exchange rate system and in theory, Hong Kong interest rates should follow the movement of the US interest rates in order to maintain the stability of the Hong Kong dollar exchange rate. Referring to the last interest rate hike cycle, the United States raised interest rates 9 times to 2.25%, Hong Kong only raised interest rates once to 0.125%, the market expects that when the balance of the banking system in Hong Kong falls back to the level of $100 billion, the banks will have to consider raising interest rates.


With the interest rate remaining unchanged in Hong Kong, it is believed that the property market will be positively supported, especially for small to medium priced properties, which will benefit from the interest rate stability and the Government's measure to adjust the stamp duty for first-time buyers. With the lower stamp duty and unchanged interest rates, it is expected that the proportion of first-hand transactions of $10 million or below will account for 80% of the total first-hand transactions.


While the pace of interest rate hikes in the US has slowed, the Hong Kong economy has gradually returned to normal, driven by the full customs clearance between Hong Kong and the Mainland, and the property market has improved, with prices and volumes rising. The first-hand market is very lively, with a number of brand new properties coming on stream and new properties being launched all the time, so it is believed that the market will remain buoyant.


The pace of interest rate hikes in the United States will continue to slow down in order to stabilise the banking system, and interest rates are even expected to peak, so it is believed that interest rates in Hong Kong will not rise significantly in the future.

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