Understanding the Difference Between H-Rate and P-Rate Mortgages

When purchasing a property and applying for a mortgage in Hong Kong, the most common floating-rate mortgage plans are H-rate and P-rate mortgages. The former is based on the Hong Kong Interbank Offered Rate (HIBOR), while the latter is based on the HKD Prime Rate (P).

When comparing the two, you should consider factors including the effective interest rate, capped interest rate, cash rebates and repayment arrangements, rather than focusing solely on the current mortgage rate. You should also maintain sufficient emergency funds to avoid disrupting your day-to-day cash flow if interest rates fluctuate.

H-rate mortgage is a mortgage plan based on Hong Kong Interbank Offered Rate (HIBOR), the rate at which banks lend to one another.

• Interest-rate basis: The actual mortgage rate is calculated as "H + a fixed basis point (%)" (for example, H + 1.3%)
• HIBOR tenors: HIBOR has different tenors ranging from overnight to 12 months. Commonly available options are 1, 3, 6 and 12 months, with most "H-rate" mortgages using the 1-month HKD HIBOR
• Variable repayments: As HIBOR is typically reset monthly, repayment amounts may change from month to month. H-rate mortgages are therefore generally considered more variable
• Interest-rate cap: To prevent customers’ mortgage costs from increasing without limit when HIBOR rises, banks generally set a maximum mortgage interest rate, commonly known as the cap rate. If HIBOR rises above this level, the mortgage interest rate will be calculated using the capped rate. The cap is usually determined with reference to the Hong Kong dollar prime rate (P) ^[1]

"P-rate" mortgage is a mortgage plan based on the HKD Prime Rate (P).

• Interest rate basis: The actual mortgage interest rate is calculated as "P minus a fixed basis point", for example, P − 1.75%
• Big P and Small P: Different banks use different prime rates, colloquially known as "Big P" or "Small P". Banks using "Big P" are not necessarily more expensive, as they compete by offering larger discounts off P. The full rate including adjustments and the cap must be compared together
• Stable repayments: The Prime Rate is generally more stable than HIBOR, making "P-rate" monthly repayments easier to budget and is well suited to borrowers who prefer predictability

In short, an "H-rate" mortgage may suit customers who can tolerate fluctuations in their repayments, while a "P-rate" mortgage may be better for customers who prioritise repayment stability.

• Low HIBOR environment: "H-rate" mortgages generally offer better value
• High HIBOR environment: If the "H-rate" cap matches the "P-rate", the "H-rate" mortgage will be a better option. Even if HIBOR surges, the "H-rate" will at most match the "P-rate" and never exceed it
• "P-rate" suits stability-seekers: The Prime Rate is relatively stable and less prone to major changes, so under a "P-rate" plan the monthly mortgage repayment amount is easier to budget for. It's suitable for customers who seek consistency, as it's easy to estimate interest expenses
• The full cycle: In a low-rate cycle, funding costs tend to be lower. A rate-hike cycle may push up both HIBOR and the Prime Rate. Assess the full loan term, not just the current rate

• Extend the loan tenor: This reduces your monthly repayments.
• Deposit-linked mortgage: The deposit interest rate of the owner's deposit-linked mortgage account will be the same as the mortgage interest rate. The deposit interest in the account can offset the mortgage expense, which helps reduce the impact of rate hikes on mortgage repayments
• Fixed monthly repayments: The repayment amount remains fixed throughout the repayment period, making it easier to estimate each instalment’s housing costs and avoiding the risk of further increases in mortgage interest rates. However, if mortgage interest rates rise, the repayment period or the regular monthly repayment amount may be adjusted in accordance with the terms agreed with the bank

Use the interest savings to increase repayments, build an emergency fund or reduce other high-interest debt. Don't over-borrow just because rates have come down.

If you're considering early repayment, check the prepayment penalty period, handling fees and the bank's arrangements for partial repayments first, then decide whether to direct the funds towards repayment or to retain liquidity.

• Stress-test first: Calculate the monthly repayments under different interest-rate increase scenarios
• Then compare the full terms: Look at the interest-rate caps, cash rebates, penalty periods and refinancing costs
• Ask about the application process: Mortgage Specialists at Hang Seng Mortgage Centre draw on comprehensive professional mortgage expertise to answer mortgage-related enquiries and tailor a one-stop mortgage service to customers' needs ^[2]
  
  Whether you choose an "H-rate" mortgage or a "P-rate" mortgage, the Fixed Basis Points agreed by both the lender and borrower after signing the mortgage agreement will remain unchanged. However, the underlying "H rate" and "P rate" are variable. Property owners should therefore pay close attention to interest-rate trends.
  
  Our New Purchase Mortgage Plan offers both HIBOR Mortgage Plan and Prime-based Mortgage Plan. The former provides protection through an interest rate cap based on the HKD Prime Rate ^[1], easing your house-buying pressure.