additional resources, if some modification were made to the terms of the existing scheme. Discussions have, therefore, been held with the four principal banks concerned, to establish the terms on which they consider that the whole banking and deposit-taking company sector would be pre- pared to make up the shortfall.
15
The four banks have emphasised their continuing commitment to the Home Ownership Scheme, but they have also said that they are not willing to continue to provide 92% of the funds needed for the scheme, when their deposit base has shrunk (in relative terms), and the cost of their deposits has risen so sharply. They have suggested that the interest rate formula for Home Ownership Scheme mortgages should be amended, to remove the maximum of 9%, and to bring the rate closer to the current market rate for commercial mortgages; they have also suggested that the portion of outstanding Home Ownership Scheme mortgages which is guaranteed by the Government should be specified as a liquid asset for banks and for deposit-taking companies under the Banking and the Deposit- taking Companies Ordinance.
Revision of the Interest Rate Formula
16
follows:
(a)
(b)
(c)
The existing formula creates a blended interest rate as
the average of the time-weighted average of the best lending rate of each of the note-issuing banks for the last twelve months;
the average of the time-weighted average of the 10-year standard residential mortgage rates of each of the Bank of East Asia, Chartered Finance (Hong Kong) Limited, the Hang Seng Bank and Wayfoong Finance Limited for the last twelve months;
1/3rd of (a) plus %, added to 2/3rd of (b) minus 1%, rounded downwards to the nearest %, and subject to a minimum of 7%, and a maximum of 9%.
The formula is thus based on both short-term and long-term rates, with an allowance for the value of the Government guarantee (which covers 1/3rd of the outstanding principal and interest on each mortgage).
17
The ceiling of 9% was reasonable at the time it was agreed in June 1978, when the best lending rate stood at 5% (having just been raised from 4 3/4%) and the standard domestic mortgage rate was 10%. However, a 9% ceiling now, with the best lending rate at 14% and the standard mortgage rate at 15%, seems much less reasonable on a short term view.
CONFIDENTIAL
No comments yet.
Private notes are available after approval.