- Borrowers can save HK$84,000 by enjoying a 2.1 per cent cash rebate on a HK$4 million on mortgage transfers to HSBC
- HSBC is reducing the cash rebate to 1.5 per cent as it looks to restore the normal profit margin on mortgages, with other banks following suit
HSBC’s abrupt and drastic cut in cash rebate on mortgage refinancing from 2.1 per cent to 1.5 per cent last month startled the mortgage industry.
Assuming an average loan size of HK$4 million (US$511,000), the borrower would now get HK$24,000 less cash rebate for refinancing at HSBC.
Refinancing has grown by leaps and bounds in recent years. According to data from the Hong Kong Monetary Authority, refinancing accounted for nearly 30 per cent of total mortgages approved in May. Over the past three years, the steady decline in mortgage rates and the sharp increase in cash rebate has made refinancing a valuable tool for borrowers who wish to save a bundle.
So, what exactly is mortgage refinancing?
As simple as it sounds, it refers to the replacement of an existing mortgage with a new mortgage in a new bank. Reasons homeowners refinance vary, with obtaining a lower interest rate and cash rebate being the greatest incentives.
Consider a borrower with an outstanding mortgage of HK$4 million. If the borrower refinances the mortgage to a new bank, he/she can enjoy a one-time cash rebate of 2.1 per cent which equals HK$84,000, and a half to one-year free fire insurance.
Considering that HSBC’s mortgage interest rate is only 2.375 per cent per year, receiving a cash rebate of 2.1 per cent plus other benefits means after refinancing, the interest charge is essentially free in the first year.
Upon the expiry of the mortgage lock-up period, which is two years for most banks, the borrower may refinance to another bank and get a cash rebate again. If the interest rate stays flat hereafter, the borrower can actually repeat the trick every two years such that half of the time is interest free throughout the term period of the mortgage.
However, it is merely a zero-sum game. What borrowers gain equals to what banks lose.
To rein in soaring property prices, the Hong Kong government rolled out various stringent property cooling measures in the past few years, causing transaction volume to shrink significantly.
Consequently, banks had been staging price wars in the mortgage market to compete for market share. The mortgage cash rebate increased from just 1 per cent in 2016 to a huge 2.1 per cent.
Apparently, such price war cannot be sustained indefinitely, and so HSBC decided to throw in the towel, striving to restore the normal profit margin of the mortgage industry.
Other banks jumped on the bandwagon, with the Bank of China lowering the cash rebate on refinancing to 1.5 per cent, matching HSBC’s offer.
For mortgage applicants whose application forms reach the bank by the deadline (end of July), the original cash rebate of 2.1 per cent will still apply. Hang Seng and Standard Chartered have followed suit. New applications can only get 1.5 per cent cash rebate.
Besides cutting cash rebate, large banks have also raised the ceiling rate of Hibor plan moderately (from 2.375 per cent to 2.475 per cent) for loans below HK$2 million. For every HK$1 million loan, such a rate increase will cause monthly repayment to increase by HK$50.
As far as we know, banks have no intention to increase the rebate again soon for the sake of market share, just like they did in the past. For those who want to refinance at this “cash rebate of the century”, this is the last chance. Some medium and small banks are still offering 2.1 per cent, but it has now entered the “final call” stage.
As property prices tend to rise, borrowers may opt for a mortgage cash-out during refinancing.
For example, assuming the old mortgage outstanding is HK$3 million, and the current property price HK$7 million, when refinancing, the new mortgage can be increased from HK$3 million to HK$4.2 million, hence cashing out HK$1.2 million. This cash-out amount alone earns a cash rebate of HK$25,200 itself (besides the cash rebate on the existing HK$3 million). If this HK$1.2 million is put into a mortgage linked account, the borrower is entitled to an interest rate that equals to the mortgage rate, hence this cash-out amount is interest-free.
After locking the HK$1.2 million into the mortgage linked account, one can wait for a year and then repay the whole sum to the bank as a “partial payment”. Most banks don’t have a penalty for partial payment after the first year.
Upon the repayment of the HK$1.2 million to the bank, the outstanding mortgage can return to the pre-financing level while pocketing the additional HK$25,200 rebate. Such a trick will push the total cash rebate of the whole refinancing activity higher than 2.1 per cent.
Raymond Chong is managing director at mortgage referral brokerage firm StarPro Agency
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