Facing up to rising mortgage rates
Endowus Insights
Join our in-person China & HK Market Outlook event with Abrdn, Allianz Global Investors, and JPMAM. RSVP here

Facing up to rising mortgage rates

3 Aug
2 Aug
  • Interest rates for home loans are expected to continue rising. But there are ways to ease some of these concerns.
  • Thinking of repaying your mortgage early? While that can help you save on some interest payments, it will also reduce the amount of liquid cash you have on hand and might incur a penalty. Consider, too, the opportunity cost — you’ll be forgoing the potential to earn a higher return via relatively low-risk investments.
  • One way to instil discipline is to ensure that for every $1 that goes into paying your mortgage, another $1 is put to the investing grind. 
  • Endowus has a suite of model portfolios — including the advised Cash Management model portfolios and Passive Income model portfolios — curated for investors to make their cash savings work harder for a more comfortable future.

Chances are, for those of us who have mortgages in Hong Kong, you would realise your latest monthly mortgage repayment has reached a record high.

The 1-month HIBOR (HK Interbank Offered Rate), which is the key benchmark rate for pricing home mortgages in Hong Kong, rose to 5.25%, as of 27 July 2023 — that’s 4 times the year-ago rate of 1.31%.

This is the result of aggressive rate hikes by the US Federal Reserve since the middle of last year with aims to tame red-hot inflation in the US. The Hong Kong Monetary Authority (HKMA) has to follow in lock-step to increase the city’s benchmark rate due to the HK dollar’s (HKD) currency peg with the US dollar (USD).

With the dramatic shift to sharply higher borrowing costs after a decade long of ultra-low interest rates, let’s look at some options on how you can better manage your mortgage payments in this rising rate environment.

Weigh pros and cons of early mortgage repayment

Given the rising mortgage rates, some may wonder if they should repay their home loans early. Here are the pros and cons you can consider in deciding whether that will be the right option for you:

Pros of early mortgage repayment

1. Save interest by paying off the loan

The logic behind early repayment is simple. By paying off your loan, you reduce your outstanding loan balance, and hence lower the total amount of interest you have to pay over the life of the loan.

For example, if you have a 30-year HK$5 million mortgage that has an outstanding term of 10 years at 3.5% interest, by repaying 10 years early, you can save close to HK$423,800 in interest. 

That said, you may notice that in this example, the interest saved represents only 14% of the total interest cost of the 30-year loan. This is because of the mechanics of loan amortisation — interest payments are front-loaded in the loan’s first 20 years, which means that near the end of the loan life you are mainly paying back the principal amount.  Hence, the repayment calculation might also depend on the remaining length of your mortgage loan life. 

2. Peace of mind

After more than a decade of low interest rates, rates are on the up as inflation is still a pressing concern for now. It might be prudent to reduce your loan now to ease off the mental pressure that comes with monthly mortgage repayments.

Cons of early mortgage repayment

1. Opportunity cost or the foregone interest that could be earned in the market

For some, an important factor in deciding whether to pay off their mortgages early, comes down to the opportunity cost of doing so. That is, they may consider the interest that could be potentially earned on the cash if it had not been used for early loan repayment.

When interest rates were at ultra-low levels in the past decade, the opportunity cost was low. In order to earn a higher return on cash, one had to take more risks by dabbling into stocks and other higher-yielding investment opportunities.  

At the current elevated interest rate levels, the opportunity cost for early repayment has also increased. Fixed deposits and other cash management products could provide yields of 5% per annum or even higher (as of end-July 2023). 

On the other hand, most mortgages in Hong Kong would have a maximum ceiling on the interest rate, which is calculated as a deduction (usually about 2%) against the bank’s Prime Lending Rate, which stands at 5.875% for most key banks in Hong Kong as of 28 July 2023.  This means that for most of us, our prevailing mortgage rate would be lower than yields offered by fixed deposits and relatively safe cash management investment products. Hence, some individuals might see it as an opportunity cost to repay the loan early, as they would be forgoing the opportunity to potentially earn a higher return via relatively low-risk investments. 

2. Reduces liquidity

Paying off your home loan early will reduce the amount of liquid cash you have on hand and potentially deplete your emergency fund. This means that if you have an urgent need for a large sum of cash in the future, due to unforeseen circumstances, you might have to consider selling your property or to take up a home equity loan.  

3. Early repayment penalty

Another thing to note is the penalty that could be incurred when you partially prepay or fully redeem the entire mortgage within the mortgage’s lock-in period, which is typically 2 to 5 years. Generally, a penalty of 1.50% will be charged on the amount prepaid, or HK$15,000 for a HK$1 million prepayment.

There might be special offers by banks that allow partial prepayments within the lock-in period, without incurring penalties. The quantum of partial prepayments varies across the banks; it ranges from around 30% to 50% of the outstanding loan amount.

Be Cash Smart: Looking into cash management products and options

A mortgage is a long-term and significant commitment. In an elevated interest rate environment, it is important to ensure that your existing cash is being worked harder to make up for the higher expense.

One way to instil discipline is to ensure that for every $1 that goes into paying your mortgage, another $1 is put to the investing grind. 

Local savvy deposit “yield hunters” have noticed that banks in Hong Kong are beginning to offer more favourable time-deposit rates after more than a decade of low interest rates. However, those of us who have mortgage obligations that are recurring monthly cash outflows might prefer to preserve our cash savings’ liquidity. In that case, you may consider other cash management options such as money market funds which could offer better liquidity and flexibility. 

It should be clearly noted that although money market funds (MMFs) are not capital-guaranteed, they generally invest in high quality money market instruments and are generally considered to have low investment risk.

On Endowus Hong Kong’s Fund Smart platform, we offer a diverse range of HKD and USD MMFs with no lock-up restrictions. Investors are free to withdraw their money from these funds at any time. 

If you would prefer an advised portfolio instead of buying single funds, consider the Endowus Cash Management model portfolios, which are designed by our Investment Office for short-term cash management and built using high-quality MMFs or ultra-short duration fixed-income funds. As of the end of July 2023, the latest projected net yields of the Endowus Cash Management model portfolios stood at 4.8%-5.2% p.a. Learn more here.

Financial planning for the long term: generating passive income for your mortgage 

Of course, while the mortgage burden hits us monthly, the reality is that it is a major long-term debt commitment and comes alongside other big-ticket expenses in life that are becoming more expensive. 

Taken in totality, it is worthwhile to look at how you are investing beyond relatively low-risk cash management products, for the pockets of cash that are not used for liquidity items, to harness the power of compounding and market premiums. 

Investors looking for passive income can consider putting money into bonds that are also rising in yields, or in dividend-paying stocks. Endowus has a whole suite of model portfolios, such as the Global model portfolios and the Passive Income model portfolios as well as tactical options through single funds on our Fund Smart platform — curated for investors to make their cash savings work harder for a more comfortable future. 

Managing property debt is one of the most important financial decisions we can make in our lives. With digital wealth platform Endowus, you can plan and manage your money by investing in low-cost money market funds and passive income portfolios seamlessly. To get started, click here.


Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance or returns. Projected performance or returns is not guaranteed to materialise. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

General risk warnings relating to collective investment schemes 

Before making an investment decision, you are reminded to refer to the relevant prospectus/ offering document for specific risk considerations and related fees and charges.

Funds are not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested.  

Some of the funds also involve derivatives. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.


Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus HK Limited (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus HK Limited, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

No invitation or solicitation

Nothing contained [in this article] should be construed as a solicitation, an offer to buy or sale, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction in any jurisdiction in which such solicitation, offer to buy or sale would be unlawful under the securities laws in such jurisdiction. No information included [on this website/ in this article] is to be construed as investment advice or as a recommendation or a representation about the suitability or appropriateness of any advisory product or service; or an offer to buy or sell, or the solicitation of an offer to buy or sell, any security, financial product, or instrument; or to participate in any particular trading strategy. Investors should seek independent financial and tax advice before making any investment decision.

Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.

Complex Products

Some of the funds contained in this article are complex products and investors should exercise caution when investing in these products. Though these products have been authorised by the SFC, authorization does not imply official recommendation. SFC authorization is not a recommendation or endorsement of a product nor does it guarantee the commercial merits of a product or its performance.

This advertisement has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

More on this Tag
No items found.
All you need to know about personal finance and investing
Please wait while we are submitting your email...
Thank you! Your submission has been received!
invalid email address

Table of Content