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Interest Rate Risk in the Pricing of Banks’ Mortgage Lending

In: The Banking Sector in Hong Kong

Author

Listed:
  • Jim Wong
  • Laurence Kang-Por Fung
  • Tom Pak-Wing Fong
  • Cho-Hoi Hui

Abstract

Intensive competition among banks in Hong Kong has driven the effective mortgage interest rates down to a historic low of around 2.75 per cent below best lending rate (BLR) with cash rebates of 1 per cent of loan amounts in general since early December 2004.2 This, together with falling interest rates, has brought the average mortgage rate down gradually from over 11 per cent in early 1998 to just over 2 per cent in December 2004 (see Figure 5.1). One key reason why banks can offer such low rates is their extraordinarily low funding cost. The spread of BLR over 3-month Hong Kong Interbank Offered Rate (HIBOR) has been maintained at around 460 basis points (bps) since September 2003, as a result of the abundance of liquidity in the banking sector. At the same time, customers’ deposit rates have also been at very low levels. On average, the spreads of BLR over the average time deposit rate (TDR) and the effective deposit rate (EDR) have been about 500 bps.3

Suggested Citation

  • Jim Wong & Laurence Kang-Por Fung & Tom Pak-Wing Fong & Cho-Hoi Hui, 2008. "Interest Rate Risk in the Pricing of Banks’ Mortgage Lending," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Hans Genberg & Cho-Hoi Hui (ed.), The Banking Sector in Hong Kong, chapter 5, pages 69-94, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-0-230-22737-8_5
    DOI: 10.1057/9780230227378_5
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