2024-05-10 28Hse Editor
The US Federal Reserve raised interest rates again by 0.25% in July, raising the target range for the Federal Funds Rate to 5.25% to 5.5%, which is the 11th rate hike since March 2022. Subsequently, banks in Hong Kong followed suit by raising interest rates by 0.125% to 0.375%, with the prime rate ranging from 5.875% to 6.375%.
It is worth noting that Nanyang Commercial Bank, an SME bank, raised its interest rate by 0.375% to 6.125%, which is higher than the rate increase of 0.125% by most banks. Based on the mortgage cap rate of P-2.25%, Nanyang Commercial Bank's effective interest rate will increase significantly from 3.5% to 3.875%.
Let's first calculate the impact of the interest rate hike on homeowners' mortgage payments. Taking the above interest rate as an example, for a HK$5 million loan with a 30-year repayment period, the monthly instalment cost will increase from HK$22,452 to HK$23,511, which indicates an increase of HK$1,059.
Will there be another interest rate hike? The Fed's next move is full of uncertainty, with some economists suggesting that it will be the last rate hike in the cycle. Mortgage owners have been feeling the pressure of interest rate hikes. Should they repay their mortgages earlier to save interest expenses during the interest rate hike cycle?
Early mortgage repayment can be divided into "full repayment" and "partial repayment". As the name suggests, the former means that homeowners have to repay the full mortgage amount in one go, in which case the bank will ask whether they have refinanced to other banks, sold their properties, and so on. The latter means that homeowners only have to pay part of the mortgage upfront, and they can choose to repay the rest through their original means or new means.
If homeowners want to reduce interest expenses, early repayment is a less ideal option. There are two options available to owners, including tax deduction for mortgage interest (Mortgage Link) provided by banks to reduce expenses.
First of all, homeowners may consider applying for deduction of home loan interest when filing their tax return i.e. tax deduction for home loan interest, up to a maximum of HK$100,000 for the year of assessment 2023/2024, and deduction of home loan interest for a maximum of 20 years of assessment without consecutive use.
Due to the relatively high interest rate at the initial stage of mortgage repayment, property owners can also choose to use it during this period to offset part of the increased mortgage expenses during the period of interest rate hikes. However, it should be noted that the policy is only applicable to self-occupied residences; that is to say, it does not apply to uncompleted properties or rented properties, but rented properties can apply for "residential rental expenses deduction" instead.
Apart from tax deduction, there is another way to help homeowners earn interest to offset the interest expenses of mortgage repayment. It is to make good use of the high-interest deposit-linked mortgages offered by banks. The deposit in the account of the lender can enjoy the same interest rate as the mortgage plan, capped at half of the total amount of the mortgage.
The above methods can help homeowners offset the increased mortgage payment during the interest rate hike period, depending on each person’s financial situation. If you decide to repay your mortgage early, you should pay attention to the penalty interest period. Banks generally set a period of one to three years. If you repay your mortgage early within the penalty period, you will need to pay extra expenses or even return the cash rebate. Therefore, it is important to check with your bank for its actual charges and mortgage criteria.
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