The linked exchange rate, keen competition in the banking industry and significant changes in the mortgage finance market are factors behind the present  low mortgage interest rates in Hong Kong, Monetary Authority Chief Executive Joseph Yam says.

In his Viewpoint column posted on the Monetary Authority homepage, Mr Yam said the favourable trend in US dollar interest rates, which has been fully reflected in Hong Kong dollar interest rates because of the linked exchange rate, is the main reason for the fall in mortgage interest rates in Hong Kong in the past six years.

"Our monetary policy of maintaining a fixed exchange rate has therefore worked to the benefit of all those servicing mortgages," he said.

However, he said the fall in mortgage interest rates has been significantly larger than that made possible by the fall in US interest rates.

Mortgage rates decline significantly

He pointed out that in early 1998 the mortgage rate was priced at prime plus 1.25%. Now it is priced at around prime minus 2.625%.

"The mortgage rate is therefore 3.875 percentage points lower as a result of the change in pricing practice of the banks," he said.

"This, of course, is a welcome change, from the point of view of those paying mortgages, and not only new ones but also existing ones, given the willingness of the banks also to adjust the terms of existing mortgages correspondingly."

He said the reasons for this welcome change, however, may not have been widely understood.

Greater competition triggers lower rates

He said one that comes to mind readily is greater competition.

This is the result of a number of initiatives specifically to increase competitiveness in the banking system.

The first was the elimination of the Interest Rate Rules of the Hong Kong Association of Banks, which freed up the determination of deposit interest rates and increased competition among the banks.

Significant changes in the mortgage finance market also contributed to producing much more competitive mortgage interest rates, he said.

There were two notable changes, he said.

Downturn, structural change leads to competitive mortgage rates

"One was the cyclical downturn in the residential property market. The bursting of the property price bubble dampened considerably the demand for mortgage finance."

The second was the structural change in the market, he added.

Mr Yam said there has been a significant improvement in the condition in which the banks can manage the risks of their mortgage business cost-effectively.

This was made possible by the establishment of the Hong Kong Mortgage Corporation in 1997, he said, adding that since then, banks have been able to manage the risk of their mortgage portfolio, if necessary, through offloading part of it to the HKMC.