Posted by walkup2 (9 days ago)
SCMP is reporting that banks are now offering fixed price mortgages:
Banks offer fixed-rate home loans as funding costs drop. Hybrid plans lock in borrowers at the top of interest cycle
Fulton Mak
Apr 30, 2008
Cynics argue that a sure sign interest rates are due to fall further and stay down for a long while is when banks begin to promote fixed-rate lending products.
That way, lenders will lock borrowers into fixed-rate products at the top of a rate cycle and earn steadily growing margins on loans as their funding costs begin to slide further in line with falling Hibor (Hong Kong interbank offered rate) rates on the wholesale money market, the cynics say.
Does this explain the latest move by some banks - including DBS and HSBC (SEHK: 0005, announcements, news) - to launch and promote hybrid short-term fixed-rate mortgage plans?
Homebuyers choosing HSBC's fixed-rate mortgage plan will lock into a loan charged at 2.5 per cent for the first year but will thereafter float at 2.75 per cent below prime.
That translates into an effective rate of 2.5 per cent after the introductory one-year period, based on the bank's current prime rate of 5.25 per cent.
HSBC's existing floating-rate mortgages are charged 2.75 per cent below prime, which means that, as long as prime rates do not go up, there will be little chance for a borrower to lock into a fixed-rate loan.
If prime rates decline, however, a borrower who is locked into a fixed-rate mortgage product will not enjoy the benefit of a falling home loan rate.
DBS is now offering customers a hybrid fixed-rate home loan priced at 2.38 per cent for the first two years and floating at 3 per cent below prime thereafter.
Based on its prime lending rate of 5.5 per cent, this translates into an effective home loan rate of 2.5 per cent after the two-year introductory period.
A DBS floating-rate home loan is priced at 2.5 per cent, which means its fixed-rate plan appears to be a better choice as it offers a lower rate than a floating mortgage for the first two years, provided that the prime rate does not drop further.
"I think fixed-rate loans are a marketing gimmick to draw attention," said Hendrick Leung Lee-chung, director and general manager of Centaline Finance.
Mr Leung noted that banks generally do not launch fixed-rate mortgage products when interest rates are going up.
Leland Sun, chairman of Pan Asian Mortgage, agreed.
"This is nothing more than a marketing gimmick in which banks are hoping to lure or entice less sophisticated borrowers to take out these short-dated fixed-rate mortgages," Mr Sun said.
"Banks have changed tactics, switching from low mortgage rates to other offers such as shorter penalty periods and fixed-rate plans to suit different market needs, as mortgage rates are already extremely low," said Cookie Wong Wing-yan, an associate director at Ricacorp Mortgage Agency.
Ms Wong said fixed-rate plans particularly suited investors buying a flat for leasing, as they could have a worry-free period in the first few years if they secured tenants to cover part of the mortgage payment.
As the investors' mortgage payments would not be affected by changes in rates if they opted for a fixed-rate loan, this offered stability, she said.
Mr Leung believes Hong Kong will follow an expected US rate cut and lower its interest rate by another 50 basis points in the next eight months.
That would drag down prime lending rates to 4.75 per cent or 5 per cent from their current levels of 5.25 per cent for HSBC, Hang Seng Bank (SEHK: 0011, announcements, news) and Bank of China (HK), and 5.5 per cent for other banks, Mr Leung said.
While lending rates would drop, deposit rates were unlikely to fall as savings deposit rates were already close to zero, he said.
But banks were likely to change the discounts to prime lending rates at which they priced their home loans, he said.
Most lenders offer home loans that float at 2.5 per cent below prime. But as the prime lending rate had fallen, they were likely to reduce this discount factor as well to protect their lending margins.
On the other hand, some think banks are unlikely to further cut the prime rate given that lending margins are already low.
Mr Sun said that as a longer-date fixed-rate mortgage plan of up to 10 years was not available on the market, short-term borrowers may consider Hibor-based mortgages to enjoy currently low rates on this market.
