The very sharp rise in deposit rates over the last 12 months has made it much less worthwhile for a bank to commit funds at a maximum rate of 9%. For those banks which are relying on funds bought through their deposit-taking company sub- sidiaries, the average cost of their funds has risen well above the 9% level.
Maturity
A 15 year mortgage taken out in 1982 will mature in 1997. If it appears that the New Territories lease will not be renewed, explicitly or inferentially, banks may want to move assets out of Hong Kong before 1997, and so may not want to be tied by a mortgage maturing that year. However, this ignores the fact that no more than 1/15th of such a mortgage would be outstanding in 1997.
Credit Risks
HOS mortgagors are by definition in a low income range (the present household income limit is $5,000 per month), and lending institutions may fear that borrowers will not be able to keep up repayments (despite the 1/3 Government guarantee on each mortgage, the lender is still left with 2/3 of the risk, although this risk diminishes over time, as household incomes rise relative to mortgage repay- ments).
Nature of the Business of Many Banks and Deposit-taking Companies in Hong Kong Some of the banks and deposit-taking companies concentrate on wholesale banking, so there is no attraction in a specialised corner of the finance market where the asset matures in 15 years and where the market for conventional (i.e. non-HOS) mortgages is sewn up by a few companies. For others, and in particular those with no natural deposit base in Hong Kong dollar, there is little future in lending for 15 years at 9% maximum if that lending has to be financed on a 3 month basis in the inter-bank market, with the cost of funds frequently above prime.
Of the 5 reasons cited above, the first two (the availability of resources and the cost of funds) are most significant. When the deposit base of the banks which are most likely to be willing to lend for this purpose is expanding relatively slowly, it is understandable
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