Taking out a loan or mortgage can be a stressful business, whether you’re a first-time homeowner or you’ve got previous experience. The process is made increasingly complex by the way in which 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.
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”).
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.
The base rate
The base interest rate is all about the banks. When a bank needs to borrow funds, it can either do so through the Interbank Market or it can obtain Hong Kong Dollars (HKD) overnight via the Hong Kong Monetary Authority (HKMA). In the case of the latter, this occurs by means of the Discount Window Mechanism, and the base rate is what determines the cost of this kind of lending rate.
Hong Kong Interbank Offered Rate (HIBOR)
The alternative option for banks borrowing funds is to do so via the Interbank Market. The HIBOR refers to the rate at which the HKD loans are offered by banks on the Interbank Market. This occurs over a specified period of time – it may range from overnight, such as in the case of the HKMA, or up to a year.
Indeed, the HIBOR is largely influenced by the deposit rates within the interbank market, taking note from the Hong Kong Association of Banks.
Prime rate/best lending rate
Finally, the best lending rate, also known as the prime rate, is normally what’s being referred to when people simply talk about interest rates or an interest hike – that is, the rate of deposit or the lending rate within local banks. Indeed, the best lending rate is what influences the price at which local banks offer loans and mortgages to customers.
How would a Fed rate hike influence Hong Kong 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. Interestingly, the recent Fed rates hike hasn’t led to significant changes in Hong Kong interest rates. However, with interest rates rising continuously in the USA, this is bound to change soon.
How an interest rate hike will affect loans and mortgages in Hong Kong
The Fed rate hike is expected to lead to a trickle-down effect in Hong Kong, eventually resulting in the best lending rate increasing, which will affect the cost of loans for customers, as well as leading to mortgage rates rising.
Essentially, the Fed rate hike forces Hong Kong’s base rates and the HIBOR to increase, resulting in local banks increasing their best lending rates. Thus, it becomes more expensive for customers to take out loans as their repayments will be more expensive.
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.
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.
The key takeaways
It is clearly evident that any hike in interest rates have a significant influence on loans and mortgages in Hong Kong, leading to increases in the lending rate – that is, the cost of taking out a loan for consumers – as well as mortgage interest rates. It’s a good idea to keep a close eye on interest rates going forward – both locally and internationally – as this will almost certainly affect the prices of loans and mortgages for consumers.
Should you have any questions or be interested in Lendela’s diverse range of services, don’t hesitate to get in contact with us.