The two main types of mortgage plans offered by Hong Kong banks are "H Plan" and "P Plan".
The “H” in "H plan" refers to the Hong Kong Interbank Offered Rate (HIBOR), which is the interest rate for lending between banks within the Hong Kong market. HIBOR tenors could range from overnight to 12 months, and the interest rate might vary. There are 1, 3, 6, and 12-month HIBOR tenors available in the market for mortgage plans. Prospective homeowners would pay their mortgage interest based on the chosen tenor. Most "H plans" in Hong Kong are calculated by 1-month HIBOR.
"H plan" is generally considered more fluctuating as HIBOR resets every month, causing the monthly repayment amount to vary. Most banks would adopt an interest rate cap to protect its customers from drastic rate increase, that is, should the H rate be higher than the interest rate cap, the latter would be adopted. The interest rate cap is normally based on the Hong Kong Dollar Prime Rate (P).
The “P” in "P plan" refers to Prime Rate, that is, the mortgage plan calculated at Prime Rate.
Prime Rates might vary from bank to bank, for banks that adopt a higher Prime Rate, it does not necessarily entail a higher interest expense as the bank would subtract a preset percentage from the Prime Rate (P) to attract applicants.
While P rates are not fixed, it is generally more stable than H rate, making it easier for applicants to estimate the interest expense.
The change in HIBOR is subjected to the capital flows in the market. "H plan" is generally more favourable in a low interest rate environment, while in a high interest rate environment, if the cap of "H plan" is the same as P rate, "H plan" could be relatively secure given the protection provided by the interest rate cap.
Prime Rate is relatively stable with a lower chance of drastic changes, which would allow a steadier monthly mortgage repayment amount from a short term perspective when compared with HIBOR. Prime Rate might be more suitable for prudent customers, as it is easier to estimate the interest expenses.
Given the linked exchange rate between HKD and USD, interest rate differentials might precipitate market capital to flow out of Hong Kong when the interest rate in Hong Kong is lower than that of the US. A shortage of market capital might increase the cost of inter-bank loans, which could lead to an increase in HIBOR and mortgage rates.
A rise in H rate would lead to a higher cost on mortgage loans that are tied to HIBOR. Customers would be paying their mortgage repayments based on the interest rate cap in the event where H rate exceeds the cap.
When banks are in a shortage of market capital due to an interest rate hike in the US, funding cost might rise due to an increase in HIBOR, which might lead to an increase in Prime Rate.
|H plan||P plan|
|Interest rate||Relatively fluctuating||Relatively stable|
|Interest rate cap||Yes||No|
Examples of what it might be impacted by
|Market capital, HIBOR tenors||Market capital|
In the case of a higher monthly mortgage repayment amount due to an increase in mortgage interest, consider extending your mortgage repayment term to reduce the pressure.
Straight-line Repayment makes it easier to estimate mortgage repayment expenses as it offers a fixed instalment amount, and at the same time, avoids the risk of further increase in the mortgage interest rate. Though it is crucial to note that in the event where the mortgage interest rates increase, the repayment term or the monthly repayment amount might be adjusted according to the terms agreed.
Shorten loan term by increasing repayment amount at an agreed step-up rate and frequency in order to reduce the total interest expense.
Under the Mortgage-Link Loan Scheme, the savings interest rate of a prospective homeowner’s designated savings account would be equivalent to the mortgage loan interest rate. The interest generated in the designated savings account could be used to offset the mortgage expenses, which could help minimise the impact a rate hike might have on mortgage expenses.
When undergoing a mortgage rate drop cycle, prospective homeowners could compare the changes in interest rates of different mortgage plans, and leverage property refinancing to enjoy a lower interest rate while earning cash rebate. Prospective homeowners could also consider taking out additional loan to ease the mortgage repayment pressure if necessary.
All in all, when buying a home, one should consider the mortgage loan plan based on different factors such as your repayment capability, economic situation, etc.
To borrow or not to borrow? Borrow only if you can repay!
Get interest income by linking mortgage to designated savings account
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