Hong Kong"s two biggest lenders — HSBC and Bank of China (Hong Kong) — have further squeezed their margins on mortgage loans to compete for market share, setting off another round of industry-wide rate cuts that can further heighten the property market craze.
In additional to narrowing the spread to 128 basis points from 130 basis points, HSBC is offering mortgage loan borrowers a fixed rate of 1.68 percent a year in the first year of the loan being granted. Bank of China has lowered the premium of mortgage loans from the second year onward to 1.26 percent over the benchmark interbank rate, hovering at about 0.75 percent a year.
Other smaller lenders are expected to make even more aggressive cuts to compete for mortgage loan business. Industry analysts said banks are willing to squeeze their loan margins to lure potential homebuyers who have become more hesitant than before in buying properties due to growing concern over rising borrowing costs.
Hong Kong has kept its rates unchanged after previous US rate hikes. Considering the weakness of the Hong Kong dollar, which has sunk to the level that would trigger central bank intervention under the linked exchange rate mechanism, Hong Kong may have no choice but to fall in line with the US sooner or later.
By narrowing their profit margins, banks are putting greater pressure on various non-bank lenders that are vying for mortgage loan borrowers by financing the full price of the property, while banks are required by the central bank to lend no more than 70 percent of the property"s purchase price.
To be sure, increased competition among banks can have the effect of further fueling demand which, in turn, will push up property prices. But in this frenzy market, there will always be people willing to pay ever higher prices for homes they can afford.
An interest rate increase could trigger a price correction adding to the risk of borrowing at full value of the property from non-bank lenders. Cautious borrowers may want to seriously consider the banks" latest offer.