Monetary Authority guidance on cash rebates for mortgage loans aims to set out the treatment of rebates and interest or repayment holidays within the context of the well established 70% guideline and promote prudent business practices.

This was the message from Monetary Authority Chief Executive Joseph Yam in his latest Viewpoint column on the authority's website.

He said there has been a growing number of creative mortgage packages offered by banks, ranging from offers of large cash rebates to interest or repayment holidays to customers.

Mr Yam said such arrangements may be in breach of the spirit of the well-established 70% guideline, adding the authority does not wish to see the guideline erode.

Remain cautious

"Banks should continue to be cautious, as they have been during the difficult years following the Asian financial crisis, and adopt prudent risk management measures to ensure that they are protected in the event of any market correction," Mr Yam said.

While those creative mortgage packages make it easier for those wishing to buy a home, they are arguably designed in a way to lure homebuyers into committing themselves to obligations they may have difficulty honouring in the event of an interest rate hike.

"Because of the large amount of liquidity currently in the banking system, interest rates have been unusually low," he said.

"But, as we and many analysts have pointed out, the possibility of Hong Kong dollar interest rates rising sharply is quite real. It is only a matter of time, given the link between the Hong Kong and US dollar, before they return to normal levels, tracking US dollar interest rates, which are themselves on an increasing trend. And there is the possibility that the process may involve some overshooting."

He also warned that homebuyers who are required to pay only a small sum upfront may walk away from their mortgages more easily in the event of a significant downward adjustment in property prices.

Cash rebates

The authority's supervisory guidance on cash rebates should not be interpreted as price regulation for authorised institutions.

He said the authority has not put a cap on the amount of cash rebate offered by banks. However, if the cash rebate is in excess of 1% of the loan amount, banks have to treat it as part of the residential mortgage loan for calculating the loan-to-value ratio in order to protect the integrity of the 70% guideline.

Mr Yam said the removal of the Interest Rate Rules of the Association of Banks has had results beyond all expectations.

"No one could have predicted the mortgage rate, relative to prime, could come down by over four percentage points - and with cash rebates thrown in," he said.