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.

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.

  1. Base Rate

  • Used by commercial banks that need to borrow funds overnight via the Hong Kong Authority (HKMA)

  • Determines the cost of the lending rate through the Discount Window Mechanism

  1. Hong Kong Interbank Offered Rate (HIBOR)

  • Used as an alternative option for commercial banks borrowing funds via the Interbank Market

  • The rate at which the HKD loans are offered by banks on the Interbank Market

  • Occurs over a specified period of time, ranging from overnight to up to a year

  • Largely influenced by the deposit rates within the interbank market, taking note from the Hong Kong Association of Banks

  1. Prime Rate

  • The rate of deposit within local banks

  • Directly influences the price at which local banks offer loans and mortgages to customers

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. 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 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 prime rate increase, which will affect the cost of loans for customers, as well as leading to mortgage rates rising. Take a look at how it would take effect:

  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.

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.

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 contact with us.

Key Takeaways

  • Any hike in interest rates will have a significant influence on loans and mortgages in Hong Kong, leading to rising prime rates – 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.