Fixed Rate Mortgage Scheme
In recent months, market participants have been closely following global financial developments, particularly the pace of interest rate hikes in the US. For many Hong Kong residents, local interest rate movements directly impact their ability to purchase properties or their financial burden of repaying mortgages. If long-term interest rate risk is a key concern to them, an option worth considering is the Fixed Rate Mortgage Scheme.
- Fixed-rate mortgages are not new to the market. In some places such as the US, they have been a mainstream product with market share as high as 90%. The Hong Kong Mortgage Corporation Limited (HKMC) launched a pilot programme way back in 1998, providing three-year fixed-rate mortgage loans through banks. Later in 2005, the longest fixed-rate period was increased to 10 years. Given the long period of a low-interest environment in the past, however, homebuyers in Hong Kong have generally opted for floating-rate mortgages.
- Nonetheless, fixed-rate mortgages do have value as an alternative financing option that can mitigate the risk of interest rate volatility for homebuyers. In May 2020, the HKMC once again rolled out a pilot programme, which was then made permanent in November 2021, to provide fixed-rate mortgage loans for tenors of 10, 15 and 20 years. Some homebuyers who selected this tool have been able to manage interest rate risk effectively. For instance, in early 2022, the interest rate per annum for 10-year fixed-rate mortgages was 1.99%, which was higher than the effective floating mortgage rate at the time (around 1.4%). But just after six months, the actual floating mortgage rate has already increased to reach 2.5% and is expected to rise further. This suggests that fixed-rate mortgages do have their appeal.
- Of course, the current interest rate environment is substantially different from that at the beginning of the year, especially in light of the Federal Open Market Committee of the Federal Reserve (the Fed)’s three rate hikes by a cumulative 150 basis points from March to June, and a further rise of 75 basis points as announced recently. Hong Kong Dollar (HKD) interest rates have been catching up accordingly, in part reflecting market expectations of future rate increases. Against such background, the HKMC has announced amendments to the 10, 15 and 20-year fixed interest rates under the Fixed Rate Mortgage Scheme. All of them will be raised by 30 basis points, to 3.50%, 3.65% and 3.80% respectively, from 1 August. Similar to early this year, these fixed interest rates are higher than the current effective floating mortgage rates. Yet, at the current juncture, the Fed anticipates that ongoing rate hikes will be appropriate. Therefore, homebuyers should consider the risk of a continuous rise in mortgage rates.
- One may wonder how fixed interest rates for mortgages are determined, and how the Fed’s rate increase of 225 basis points year-to-date affects the fixed interest rates of the HKMC. Let me explain.
- To offer fixed-rate mortgages, the HKMC issues long-term debts and makes use of instruments like interest rate swaps for managing risks. Therefore, rather than looking at short-term interest rates alone, we also refer to the levels and trends of a series of long-term interest rates. For example, based on past data, we assume that the actual average life of mortgage loans in Hong Kong is about five years, and it can be seen from the HKD swap market that the five-year funding cost had risen by 161 basis points from 1.33% as at end-2021 to 2.94% as at 27 July 2022. Meanwhile, between end-2021 and August this year, the 10, 15 and 20-year fixed interest rates under the HKMC’s Fixed Rate Mortgage Scheme will have increased by 151 to 161 basis points. Moreover, given the many interactions between the HKD and the US Dollar (USD) markets, some USD market data can serve as useful reference. From end-2021 to 27 July 2022, the five-year US Treasury yield had risen by 158 basis points to 2.84%. Over the same period, the fixed interest rate for 15-year mortgage loans in the US had increased by 228 basis points to reach 4.82%. As can be seen above, changes to the interest rates under the Fixed Rate Mortgage Scheme are largely in line with market trends, and the extent of increase for some tenors is even smaller than that of the relevant long-term interest rates. This is attributable to the relatively sound credit rating and good financing capability of the HKMC.
- A number of recent media reports have analysed the impact of interest rate rise on homebuyers and provided an objective comparison between fixed-rate and floating-rate mortgages. For now, floating mortgage rates are still lower than fixed mortgage rates, and will remain so in the near term. Yet, the future is hard to predict. If homebuyers can lock their mortgage rates at a level for a certain period, especially during the early stage of repayment when their cash flow may be relatively tight, their financial burden may become more stable. As such, the Fixed Rate Mortgage Scheme is indeed an option worth considering.
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