【U.S. Interest Rate】How will it affect the cost of housing mortgages?
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The U.S. interest rate hike has shaken the global market. Under the Fed Interest Rate Decision, how can property buyers smartly choose their H Plan or P Plan?
The latest interest rate hike by the United States has shaken the global economy, including the city of Hong Kong. Given the linked exchange rate between Hong Kong dollars (HKD) and U.S. dollars (USD), Hong Kong banks have also increased the mortgage rates for "P Plan” and “H Plan”, consequently lifting up the cost of housing mortgages. With the United States Fed Interest Rate Decision in place, how can new property buyers smartly choose “H Plan” or “P Plan” that best suits their needs? This article is going to share with you some important tips. (Attached at the end is the United States Fed Interest Rate Decision)
How will the U.S. interest rate hike affect Hong Kong people’s cost of housing mortgages?
First of all, bank capital can be summarised into three main categories, including (1) customer deposits, (2) interbank lending loans, and (3) lending with collateral from the Hong Kong Monetary Authority (HKMA). The bank has to maintain its capital adequacy from the above three sources for daily settlement. Therefore, the interest a bank pays for its loans is referred to as the bank’s capital cost.
Due to the U.S. interest rate hike, the Hong Kong Interbank Offered Rate, or the HIBOR, the interest rate for lending between banks within the Hong Kong market will also expect a rise, as well as HKMA’s Discount Window Basic Interest Rate. This indicates that banks would have to pay higher interests to lend from their cohorts or the HKMA, resulting in an increase in their capital cost.
Theoretically, besides the sources of its capital cost, the bank also has an array of other considerations to determine whether there is a need to adjust the deposit interest and mortgage rate to gather more capital. However, the public is mostly expecting a foreseeable pattern of: U.S. interest rate hike ➜ Increase in capital cost of Hong Kong banks ➜ Increase in Hong Kong banks’ “P Plan” and “H Plan” mortgage rates ➜ Temporary fluctuation in the cost of housing mortgages.
Why will the U.S. interest rate hike affect “H Plan” and “P Plan”?
“P Plan” and “H Plan” are two main types of housing mortgage plans offered by Hong Kong banks. Both plans’ interest rates are relatively fluctuating and affected by the Fed interest rate.
The actual interest rate of P Plan = Prime rate adopted by the bank (P) - a pre-set percentage set by the bank (%)
● P Plan is the short form for Prime-based Mortgage Plans
● Prime rate adopted by different banks vary, usually adjusted according to the Fed interest rate
● Prime Rate is relatively stable, normally without drastic changes in up to 10 years
● Although P Plan can offer a steadier interest rate, the calculated interest for housing mortgage is usually higher when compared to H Plan
Actual interest rate of H Plan = Hong Kong Interbank Offered Rate (H) + a pre-set percentage set by the bank (%)
● H Plan is the short form for HIBOR-based mortgage plans
● HIBOR is relatively low most of the time, but since there is an increasing demand in HKD due to U.S. interest rate hike, HIBOR is also expecting a rise.
● Although HIBOR fluctuates every day, most banks would adopt an interest rate cap, normally based on the Hong Kong Dollar Prime Rate (P).
● H Plan allows a lower mortgage repayment amount in a low interest rate environment
Example of how the U.S. interest rate hike affects the cost of housing mortgages in HK
As previously mentioned, U.S. interest rate hike ➜ Rise in HIBOR ➜ Increase in capital cost of Hong Kong banks ➜ Increase in Hong Kong banks’ “P Plan” and “H Plan” mortgage rates. Since the beginning of 2022, HIBOR has experienced a continual increase, from 0.15% to 2.6% in September and 3.21% in November, respectively, which is the highest in 14 years. Although it has a certain impact on housing mortgages, Hong Kong still lags behind the U.S. interest rate hike. Meanwhile, the U.S. Federal Reserve has also hinted that it may narrow the interest rate hike by the end of this year.
Among major banks, HSBC was the first to announce an increase in its prime rate (P) from 0.125% to 5.125% after the Federal Reserve’s fifth interest rate hike in September. It increased further by 0.25% to 5.375%. Minus (P) by the preset percentage point adopted by the bank will then obtain the actual mortgage interest rate.
Taking the actual interest rate of 2.975% as an example, the average monthly repayment for 30 years has increased by 3.3%. For property buyers, it is still an acceptable payment fluctuation during the economic cycle. If converted to the repayment amount, for every $1 million in mortgage payments, buyers have to pay $134 more.
Take the average mortgage amount of $5 million (with a 30-year period) as an example:
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Is “H Plan” more cost-effective in its interest rate than “P Plan”?
Previously, under a low-interest rate environment, since H Plan normally had lower interest rates, it was more popular among property buyers. Even if HIBOR fluctuated at times, it rarely hit the interest rate cap of the P Plan. According to a residential mortgage survey done by the HKMA, the ratio of H Plans and P Plans undertaken by private property buyers is 9:1. Taking the figures in August 2022 as an example, among over 10,000 newly approved loan applications, H Plans accounted for 96.6%, P Plans only 1.3% and others 2.1%, and there were no fixed-rate mortgages. In the past, when the government sold subsidised housing, only P Plans were accepted. However, it is expected that by the end of 2022 onwards, buyers will also be able to choose H Plans.
However, some also point out that under the U.S. interest rate hike cycle, some major banks have lowered the actual interest rate of the P Plan to lower than the H Plan interest rate cap. If the U.S. interest rate hike cycle continues in the next 2 years, P Plan could be a better option than H Plan in the short term.
Would the H Plan interest rate cap help homeowners shun the U.S. interest rate hike?
Under the U.S. interest rate hike cycle, if there is a continual shortage in HKD supply, HIBOR might show an upward trend, which could result in an increase in interest rates by banks to reduce loans and gather more deposits, ultimately increasing bank capital circulation. When P increases, buyers will also expect an increase in H Plan’s interest rate cap.
Will the cost of housing mortgages in Hong Kong continue to increase?
Currently, mortgage rates within Hong Kong’s property market are still at a relatively low level. Referencing the mortgage interest rates in the past 30 years, the mortgage interest rate in Hong Kong had even reached above 10% in the 90s. Although in the past few years, the low interest rate environment in Hong Kong has propelled the appreciation of property prices, due to high property prices, the entry threshold is still rather unreachable for first-time buyers.
Under the U.S. interest rate hike cycle, property prices in Hong Kong have slightly rebounded. But self-occupied buyers who have stable jobs and financial capability, still have to consider their own needs and payment ability. Therefore, the interest rate hike would have a lesser impact on them compared to investment buyers. The rebound of property prices does not necessarily lift up the overall cost of buying a property.
In addition, interest rates are not the only factor affecting Hong Kong's property market. Other important factors include the overall economic development, future housing supply, as well as market sentiment.
Tips for mortgagors under the U.S. interest rate hike cycle
In recent years, some banks have introduced mortgage discount offers, such as deposit-linked mortgage plans, which provide high-interest savings rebates for contributors. This helps to offset the mortgage interest and make it more economical. Contributors may also consider remortgaging to other mortgage plans with cash rebates. For people who have sufficient money in hand and wish to avoid remortgage procedures, under the interest rate hike cycle, high-interest regular savings plans offered by various banks are also worth considering. Some plans even have an annual interest rate of over 3%.
2022 U.S. Interest Rate Hike Cycle / Fed Interest Rate Increase Schedule
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Latest News of the U.S. Interest Rate Hike:
● On 2 November 2022 HKT, the U.S. Federal Reserve announced its sixth interest rate increase in 2022, raising the interest rate by 0.75% to between 3.75% and 4%. The Fed expects during its next interest rate increase in December, the interest rate may only be increased by 50 basis points, rather than 75.
● On 22 September 2022 HKT, the U.S. Federal Reserve announced its fifth interest rate increase in 2022, raising the interest rate by 0.75% to between 3% and 3.25%, marking its highest since 2008. The Hong Kong Monetary Authority also immediately raised the Discount Window Basic Interest Rate from 2.75% to 3.5%. Among all major banks, HSBC was the first to announce that it will raise the prime interest rate by 0.125% on 23 September. The U.S. Federal Reserve expects another interest rate increase to 4.4% by the end of 2022, and the interest rate is expected a continual increase to 4.6% by the end of 2023. There are currently no signs of any interest rate cut before 2024.
Planning to buy a property? Contact us now, our experienced property management team will answer your questions about interest rate hikes and will follow you Introduce the real estate in each district according to the requirements.
Next Article【Tax Deduction for Domestic Rent】A Guide to Eligibility & Allowable Deduction
How will the U.S. interest rate hike affect Hong Kong people’s cost of housing mortgages?
First of all, bank capital can be summarised into three main categories, including (1) customer deposits, (2) interbank lending loans, and (3) lending with collateral from the Hong Kong Monetary Authority (HKMA). The bank has to maintain its capital adequacy from the above three sources for daily settlement. Therefore, the interest a bank pays for its loans is referred to as the bank’s capital cost.Due to the U.S. interest rate hike, the Hong Kong Interbank Offered Rate, or the HIBOR, the interest rate for lending between banks within the Hong Kong market will also expect a rise, as well as HKMA’s Discount Window Basic Interest Rate. This indicates that banks would have to pay higher interests to lend from their cohorts or the HKMA, resulting in an increase in their capital cost.
Theoretically, besides the sources of its capital cost, the bank also has an array of other considerations to determine whether there is a need to adjust the deposit interest and mortgage rate to gather more capital. However, the public is mostly expecting a foreseeable pattern of: U.S. interest rate hike ➜ Increase in capital cost of Hong Kong banks ➜ Increase in Hong Kong banks’ “P Plan” and “H Plan” mortgage rates ➜ Temporary fluctuation in the cost of housing mortgages.
Why will the U.S. interest rate hike affect “H Plan” and “P Plan”?
“P Plan” and “H Plan” are two main types of housing mortgage plans offered by Hong Kong banks. Both plans’ interest rates are relatively fluctuating and affected by the Fed interest rate.The actual interest rate of P Plan = Prime rate adopted by the bank (P) - a pre-set percentage set by the bank (%)
● P Plan is the short form for Prime-based Mortgage Plans
● Prime rate adopted by different banks vary, usually adjusted according to the Fed interest rate
● Prime Rate is relatively stable, normally without drastic changes in up to 10 years
● Although P Plan can offer a steadier interest rate, the calculated interest for housing mortgage is usually higher when compared to H Plan
Actual interest rate of H Plan = Hong Kong Interbank Offered Rate (H) + a pre-set percentage set by the bank (%)
● H Plan is the short form for HIBOR-based mortgage plans
● HIBOR is relatively low most of the time, but since there is an increasing demand in HKD due to U.S. interest rate hike, HIBOR is also expecting a rise.
● Although HIBOR fluctuates every day, most banks would adopt an interest rate cap, normally based on the Hong Kong Dollar Prime Rate (P).
● H Plan allows a lower mortgage repayment amount in a low interest rate environment
Example of how the U.S. interest rate hike affects the cost of housing mortgages in HK
As previously mentioned, U.S. interest rate hike ➜ Rise in HIBOR ➜ Increase in capital cost of Hong Kong banks ➜ Increase in Hong Kong banks’ “P Plan” and “H Plan” mortgage rates. Since the beginning of 2022, HIBOR has experienced a continual increase, from 0.15% to 2.6% in September and 3.21% in November, respectively, which is the highest in 14 years. Although it has a certain impact on housing mortgages, Hong Kong still lags behind the U.S. interest rate hike. Meanwhile, the U.S. Federal Reserve has also hinted that it may narrow the interest rate hike by the end of this year.Among major banks, HSBC was the first to announce an increase in its prime rate (P) from 0.125% to 5.125% after the Federal Reserve’s fifth interest rate hike in September. It increased further by 0.25% to 5.375%. Minus (P) by the preset percentage point adopted by the bank will then obtain the actual mortgage interest rate.
Taking the actual interest rate of 2.975% as an example, the average monthly repayment for 30 years has increased by 3.3%. For property buyers, it is still an acceptable payment fluctuation during the economic cycle. If converted to the repayment amount, for every $1 million in mortgage payments, buyers have to pay $134 more.
Take the average mortgage amount of $5 million (with a 30-year period) as an example:
Is “H Plan” more cost-effective in its interest rate than “P Plan”?
Previously, under a low-interest rate environment, since H Plan normally had lower interest rates, it was more popular among property buyers. Even if HIBOR fluctuated at times, it rarely hit the interest rate cap of the P Plan. According to a residential mortgage survey done by the HKMA, the ratio of H Plans and P Plans undertaken by private property buyers is 9:1. Taking the figures in August 2022 as an example, among over 10,000 newly approved loan applications, H Plans accounted for 96.6%, P Plans only 1.3% and others 2.1%, and there were no fixed-rate mortgages. In the past, when the government sold subsidised housing, only P Plans were accepted. However, it is expected that by the end of 2022 onwards, buyers will also be able to choose H Plans.However, some also point out that under the U.S. interest rate hike cycle, some major banks have lowered the actual interest rate of the P Plan to lower than the H Plan interest rate cap. If the U.S. interest rate hike cycle continues in the next 2 years, P Plan could be a better option than H Plan in the short term.
Would the H Plan interest rate cap help homeowners shun the U.S. interest rate hike?
Under the U.S. interest rate hike cycle, if there is a continual shortage in HKD supply, HIBOR might show an upward trend, which could result in an increase in interest rates by banks to reduce loans and gather more deposits, ultimately increasing bank capital circulation. When P increases, buyers will also expect an increase in H Plan’s interest rate cap.Will the cost of housing mortgages in Hong Kong continue to increase?
Currently, mortgage rates within Hong Kong’s property market are still at a relatively low level. Referencing the mortgage interest rates in the past 30 years, the mortgage interest rate in Hong Kong had even reached above 10% in the 90s. Although in the past few years, the low interest rate environment in Hong Kong has propelled the appreciation of property prices, due to high property prices, the entry threshold is still rather unreachable for first-time buyers.Under the U.S. interest rate hike cycle, property prices in Hong Kong have slightly rebounded. But self-occupied buyers who have stable jobs and financial capability, still have to consider their own needs and payment ability. Therefore, the interest rate hike would have a lesser impact on them compared to investment buyers. The rebound of property prices does not necessarily lift up the overall cost of buying a property.
In addition, interest rates are not the only factor affecting Hong Kong's property market. Other important factors include the overall economic development, future housing supply, as well as market sentiment.
Tips for mortgagors under the U.S. interest rate hike cycle
In recent years, some banks have introduced mortgage discount offers, such as deposit-linked mortgage plans, which provide high-interest savings rebates for contributors. This helps to offset the mortgage interest and make it more economical. Contributors may also consider remortgaging to other mortgage plans with cash rebates. For people who have sufficient money in hand and wish to avoid remortgage procedures, under the interest rate hike cycle, high-interest regular savings plans offered by various banks are also worth considering. Some plans even have an annual interest rate of over 3%.2022 U.S. Interest Rate Hike Cycle / Fed Interest Rate Increase Schedule
Latest News of the U.S. Interest Rate Hike:
● On 2 November 2022 HKT, the U.S. Federal Reserve announced its sixth interest rate increase in 2022, raising the interest rate by 0.75% to between 3.75% and 4%. The Fed expects during its next interest rate increase in December, the interest rate may only be increased by 50 basis points, rather than 75.
● On 22 September 2022 HKT, the U.S. Federal Reserve announced its fifth interest rate increase in 2022, raising the interest rate by 0.75% to between 3% and 3.25%, marking its highest since 2008. The Hong Kong Monetary Authority also immediately raised the Discount Window Basic Interest Rate from 2.75% to 3.5%. Among all major banks, HSBC was the first to announce that it will raise the prime interest rate by 0.125% on 23 September. The U.S. Federal Reserve expects another interest rate increase to 4.4% by the end of 2022, and the interest rate is expected a continual increase to 4.6% by the end of 2023. There are currently no signs of any interest rate cut before 2024.
Planning to buy a property? Contact us now, our experienced property management team will answer your questions about interest rate hikes and will follow you Introduce the real estate in each district according to the requirements.
Next Article【Tax Deduction for Domestic Rent】A Guide to Eligibility & Allowable Deduction
11 JAN 2023
