A new mortgage product in the UK may be of interest to Hong Kong.
I was alerted, by a research report on the UK mortgage market prepared by the HKMA London office, to a relatively new mortgage product that may prove to be a win-win for banks and mortgagors in Hong Kong. This product is already available from some banks in Hong Kong, although I am not sure this fact is very well known. Whether it should be more publicised, of course, is entirely a business issue, which, as regulator, I would normally leave to the banks. But, given the possibility that such a new product may reduce the burden of mortgagors and therefore the probability of their defaulting, there is a banking stability angle in which I have a legitimate interest.
The starting point is in fact quite simple. I am sure the majority of those servicing mortgage loans also have significant balances in their current and savings accounts. These balances can be quite high immediately after the pay day of each month but would be reduced during the month as money is spent on household items, on transport, etc, and, of course, on the mortgage payment. I am also sure that they feel a little uneasy, if not aggrieved, about not being able to make use of the balances that are idly sitting there, if only temporarily, and be they high or low, more effectively to reduce at least the interest payment of their mortgages. Current account mortgages are an arrangement that will make this possible.
This relatively new product in the United Kingdom basically allows the balances in the current and savings accounts of a customer, while they sit there, to be deducted from the outstanding mortgage principal for the purpose of calculating the mortgage interest to be paid each month. This could be done on a daily basis or on a monthly average basis. However it is calculated, the computer should be able to handle the calculation without any problem. This, of course, assumes that the customer is using the same bank for his mortgage and for his current and savings accounts, which is usually the case in Hong Kong. To the bank, this will help in cementing the loyalty of the customer, as borrower and depositor, at a time when competition is keen and encouraged further by the complete liberalisation of interest rates in Hong Kong. To the customer, this should, as I said earlier, allow for the more effective use of money and hence some relieve of the burden in servicing their mortgages.
The arrangement is, in fact, akin to, but slightly more complex than, the familiar overdraft facility secured upon the residential property instead of the ordinary mortgage with fixed monthly payments. Whatever unspent household income on each and every day could be utilised for reducing the loan principal and paying interest. And there is the added flexibility for giving priority to meeting other expenses than servicing the loan secured on the property, should the situation arise, as long as the customer works within the overdraft limit. But, in view of the flexibility, the applicable interest rate now, I understand, is significantly higher (at prime if you are a good customer) than the mortgage interest rate, which is currently at around prime minus 2.5 per cent. Even then, this alternative is quite popular, particularly for those with a variable monthly income, assuming that the variability does not, in the opinion of the lending bank, affect the ability of the borrower to service the overdraft.
It may be that banks might wish to charge a different mortgage rate for the current account mortgages. I doubt that very much, but the best thing is to let the market decide. The market should be competitive enough to determine whether there is room for this type of product in Hong Kong and at what price, and I must emphasise again that, in alerting the market to the emergence of this new product in London, I am not trying to direct the development of banking business in Hong Kong. Banking stability is my starting point. This was also the case when we promoted mortgage securitisation through the creation of the Hong Kong Mortgage Corporation.
Joseph Yam
31 October 2002
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