How interest rate hikes affect loans & mortgages

Taking out a loan or mortgage can be stressful business, whether you’re a first-time homeowner or you’ve got previous experience. The process is made increasingly complex by the way that interest rates influence the rates of loan and mortgage repayments – that is, when interest rates increase, it becomes more expensive to take out a loan or mortgage.

In short, interest rate hikes make borrowing more expensive by increasing loan and mortgage repayments. This means borrowers should be more cautious, compare options carefully, and consider how rising rates may affect their long-term repayment ability.

Furthermore, there are different interest rates at play in the process and Hong Kong’s interest rates, just like any other country, are affected by changes in global interest rates, especially that of the Federal Funds Rate (or “the fed”). For borrowers, this makes timing and loan selection more important, especially when deciding between different loan types or repayment structures.

To properly understand how interest rate hikes affect loans and mortgages in Hong Kong, it’s essential to first understand the different types of interest rates in Hong Kong and how a fed rate hike would influence rates in Hong Kong.

Types of interest rates in Hong Kong

There are three main types of interest rates in Hong Kong, each of which serves a different purpose:

• Base rate

• Hong Kong Interbank Offered Rate (HIBOR)

• Prime rate / best lending rate

These different interest rates are interdependent and influence each other accordingly.

These rates ultimately influence how much borrowers pay for loans and mortgages, as changes in base rates and HIBOR are often passed on through lending rates.

How would a fed rate hike influence Hong Kong's interest rates?

Interest rates in Hong Kong are affected by outside influences, one of the most important ones being the Federal Funds Rate (FFR). The FFR, colloquially referred to as the Fed Funds Rate, is set by the Federal Open Markets Committee and guides overnight lending among banks in the United States of America (USA).

When we see the fed raising rates, this generally leads to similar increases in Hong Kong interest rates to maintain the stability of the Hong Kong Dollar. As a result, borrowers in Hong Kong may experience rising borrowing costs even if their financial situation has not changed.

Interestingly, the recent fed rates hike hasn’t led to significant changes in Hong Kong's interest rates. However, with interest rates rising continuously in the USA, this is bound to change.

How an interest rate hike will affect loans and mortgages in Hong Kong

Interest rate hikes typically lead to higher borrowing costs for both loans and mortgages in Hong Kong, affecting new borrowers and those with variable-rate loans:

1. The fed rate hike forces Hong Kong’s base rates and the HIBOR to increase, resulting in local banks increasing their prime rates.

2. It becomes more expensive for customers to take out loans as their repayments will be more expensive.

3. Similarly, when it comes to mortgage interest rates, for customers with prime rate-based mortgages, mortgage repayments will also become more expensive as they are volatile rather than fixed.

In practical terms, this means borrowers may face higher monthly repayments and a higher total cost over the life of the loan. Furthermore, even interest rate caps are not safe from drastic interest rate hikes. For instance, the HIBOR-based mortgage is protected by a cap. However, when the HIBOR increases, so too does the HIBOR-based mortgage cap, allowing the Hong Kong mortgage rates to increase more than before.

When interest rates are rising, borrowers may want to consider:

• Choosing shorter loan tenures where possible

• Comparing fixed vs variable rate options

• Ensuring repayments remain affordable even if rates increase further

In short, rising interest rates increase the cost of borrowing. For borrowers, this means comparing loan options becomes even more important during periods of rising rates.

Should you have any questions or be interested in Lendela’s diverse range of personal loan services – from comparing loan offers and finding the best interest rates to applying for a loan – don’t hesitate to get in touch with us. See the following link to compare current personal loan options. If you need funds urgently during changing rate conditions, you may also want to explore emergency loan options in Hong Kong.