First Mortgage Rate Hike in 12 Years Ends Cheap Borrowing Era in Hong Kong

After 12 years of enjoying rock-bottom interest rates, mortgage-holders in the world’s most expensive city in which to buy a home saw their days of cheap financing come to an abrupt end this past week as some 13 banks announced hikes in interest rates, with most of the higher borrowing costs having already taken effect.

Citibank started the wave of interest hikes on Tuesday, when it boosted its home loan rate by 10 basis points, effective immediately, according to an announcement by the US financial institution. Local lender Wing Lung Bank and China Construction Bank (Asia), the local branch of the big four mainland lender soon followed suit with their own mortgage rate hikes, which took effect as soon as the banks announced them on Thursday.

Rising Rates Could Be First Step in Credit Tightening

The city-wide rate hike could be the first of several rounds of tightening with investment bank UBS having warned this month that mortgage rates could increase by 50 to 75 basis points within the near future. The Swiss institution warned that the higher borrowing costs, along with other factors could cause home prices to slide by as much as 10 percent within the next 17 months.

While this first change in credit conditions was a minor one, it spread quickly through most of the major banks in the city. Hong Kong’s five biggest lenders, Hang Seng Bank, HSBC, Bank of China (Hong Kong), Standard Chartered and the Bank of East Asia, all said in separate statements that they would also increase their mortgage rates from August 13.

The rate hikes by the retail banks come after the lenders have borne higher borrowing costs over the last year without passing them along to consumers. The city’s benchmark Hibor rate has been trending upwards over the last 12 months.

HSBC, Bank of China, and Hang Seng Bank all said that they would raise their prime rate-linked mortgage rate by 10 basis points, and raise their most favorable rate for Hibor-linked mortgages to their best lending rate minus 2.65 percent, Reuters report said.

Now that banks are passing along these higher rates to their customers, most of the other lenders in the city are following the lead of the bigger players.

ICBC Asia, China Citic International, and Dah Sing Bank also raised their rates on Monday and OCBC Wing Hang Bank boosted them last Friday. So far, Singapore’s DBS bank has not announced plans to charge higher costs for its home mortgages.

Experts Question Impact of First Round of Rate Hikes

The end of 12 years of cheap borrowing could bring new challenges for highly leveraged homebuyers as the increase of 10 basis points mortgage-holders need to pay an additional HK$50 per month for every HK$1 million of loan for a 30-year tenure, and will end adding  around HK$22,000 to their obligations for every HK$1 million that they have borrowed.

However, some analysts question the immediate impact of the rate hike on the market.

“It means only a few hundred dollars additional repayment per month on a 30-year mortgage loan of HK$5 million,” KB Wong, head of valuations at property consultancy Cushman & Wakefield told Mingtiandi. “As long as the local unemployment rate stays at the prevailing low level, no significant impact on the property market is expected,”

Denis Ma, head of research for JLL Hong Kong took a similar view, at least on this first round of interest rate increases. “We maintain our house view that the initial increases in interest rates alone won’t be enough to reverse the trend in housing prices,” Ma told Mingtiandi in emailed comments.

Hong Kong homebuyers have a total of HK$1.258 trillion in outstanding mortgage loans with banks by the end of this June, and the average size of a mortgage was HK$4.08 million, according to the Hong Kong Monetary Authority.