On a medium term view, the parameters for domestic interest rates have probably shifted upwards with worsening expectations on inflation (generated by increases in oil prices) and on the time that must elapse before the pressure of domestic demand eases back. Added to the interest ceiling, the 15 years commitment (if the mortgagor does not repay early) and a background of uncertain growth in bank deposits, the Home Ownership Scheme mortgage looks like too expensive a loss leader to any bank. A Government guarantee of 1/3 of the principal and a contribution to the social welfare of Hong Kong, whether for altruistic or prestige motives, are not sufficient to make it an acceptable proposition. Looked at this way, it is not unreasonable for the banks to suggest an increase in the interest rate.
18
The first suggestion was to retain the existing formula, but to remove the minmum of 74% and the maximum of 9%. At the end of September this would have produced a rate of interest of 11,70%; but for flats completed after, say, June 1980 the rate of interest (assuming no change at all in the current level of rates) would be 14.46%. Under the terms of the existing scheme, the rate of interest is recalculated every 5 years; to remove the ceiling of 9% would therefore risk locking flat purchasers into a very high rate for a long period. This suggestion was, therefore, not accepted.
19
The four banks then suggested that the rate of interest be based solely on the 10-year mortgage rate, with a discount to reflect the value of the partial Government guarantee on each mortgage. After some discussion, it was concluded that a 10% discount would be appropriate. This would produce an end-September interest rate of 13.95% (the current 10-year mortgage rate of 15.5% less 10% (1.55%) = 13.95%). The consi- dered view of the banks is that, in current and likely future economic circumstances, it is important to base the rate of interest for this type of long-term lending directly on other long-term rates, which in turn reflect the cost and availability to the lending institutions of their deposit
resources.
20
The banks also suggested that, to avoid locking borrowers into high interest rates for a long period, assuming interest rates at their present level, the rate of interest on Home Ownership Scheme mortgages should be recalculated each year.
Specified Liquid Assets
21
The four banks requested the Government to consider the possibility of specifying as liquid assets for banks and for deposit- taking companies, under the Banking and the Deposit-taking Companies Ordinances, either the total amount, or the Government-guaranteed
CONFIDENTIAL