There is a lot of decision making in the process of your home buying. You have chosen a house that you have always dreamt of. Committing a mortgage plan that you will have to repay for the next 30 years is a big deal. We know that every 1% in our mortgage rate can make a huge difference in amount of repayment. So the problem is choosing a prime rate based or HIBOR mortgage plan? Here we explain these rates to you.
Mortgage plans in Hong Kong are divided into 2 main categories, a prime rate plan or a HIBOR-based mortgage plan.
This form of lending rate is very common among around the world. Prime rate means the best lending rate (BLR) that can be offered to you by banks. (P) is usually used to symbolized the rate and nature of prime rate based mortgage plan is a floating rate, which means it can be changed at any time. This rate is set by the banks individually.
How do you calculate Prime rate-based mortgage plan?
There are two types of prime rate in the market, the high prime rate and low prime rate. As of now, high prime rate is at 5.25%, this rate is usually used by small to medium sized banks. While bigger banks uses low prime rate of 5.0% normally.
For example, your banks is offering P-2.6% and using low prime rate of 5.0%. Therefore the difference of the calculation will be your mortgage rate.
Fluctuation of Prime Rate
Comparing to HIBOR based mortgage plan, the characteristic of Prime Rate mortgage plan is more stable. Prime rate does not fluctuate like how HIBOR does. Plus, prime rate is set by The Hong Kong Association of Banks.
HIBOR is known as Hong Kong Interbank Offered Rate, HIBOR is normally used as the interest rate offered between lending of banks. HIBOR-linked mortgage plan adopts the HIBOR rate as a base and formulate the mortgage rate. The characteristic of HIBOR is influenced by the money market movement, which means it fluctuates on a daily basis. Interest period of 1, 3, 6, or 12 months can be set on your option during the application of the mortgage. For instance, your prediction of HIBOR rate will go upward in the next 12 months, in order to save the interest expenses, you can select a longer interest period to lock the lower rate.
How do you calculate HIBOR-based mortgage plan?
HIBOR-based mortgage rate is the sum of HIBOR and the rate that a bank offers you. For instances, the current HIBOR is H+0.2%, and the bank rate is 2.4%, therefore your mortgage rate will be 2.6%. Bare in mind that HIBOR fluctuates on a daily basis, you may end up paying higher interest when HIBOR goes up.
Fluctuation of HIBOR-based mortgage rate
Comparing to prime rate, the fluctuation of HIBOR is higher. The reason to choose a HIBOR-based rate is because when the rate goes down, you can save a lot with lower interest payment. In addition, HIBOR- based mortgage plan comes with a feature called capped mortgage rate. For instance the current capped mortgage rate is P-2.5, meanwhile HIBOR mortgage rate is going up more than P-2.5. You would be paying more than that, but in fact you will only have to pay the P-2.5 until the HIBOR goes down lower than P-2.5%.
So choosing Prime rate or HIBOR in Hong Kong?
The option of this is wholly depends on the rate offered, go research around and find the best rate that you can get! If you are thinking of choosing HIBOR-based plan, talk to you mortgage consultant about the future HIBOR trend, discuss about the potential rates. Be informed that the cost of switching to prime rate based plan is high when HIBOR goes up, you might end up paying higher cost in switching your plan. Furthermore, most of the prime rate based plan offers cash rebates of 1% average, a big amount of money can be used to offset your interest payment!