HIBOR vs prime: choosing a mortgage rate in Hong Kong

Hong Kong mortgages offer two rate structures: HIBOR-based (the "H-plan") and prime-based (the "P-plan"). Most borrowers today choose an H-plan, because it tracks interbank rates that are typically lower than prime, and because every H-plan sold in Hong Kong includes a cap that converts the rate to a prime-based one if HIBOR spikes. That cap makes the H-plan effectively a two-way bet: you pay less when interbank rates are low, and you are protected when they rise. The P-plan, by contrast, moves only when the bank changes its prime rate, which happens infrequently and usually in larger steps. The headline rate you see advertised is only part of the comparison; cash rebates, penalty periods, and the cap mechanism matter as much as the initial spread.

How HIBOR-based pricing works

HIBOR (Hong Kong Interbank Offered Rate) is the rate at which banks lend to each other overnight or for a fixed term. A mortgage priced off HIBOR is quoted as HIBOR + a spread, for example "H+1.25%". The actual rate you pay resets periodically — commonly monthly — so your interest cost fluctuates with interbank liquidity.

Because HIBOR can move sharply (it fell below 0.1% during 2020–2021 and rose above 5% in late 2023), every H-plan in Hong Kong includes a cap. The cap is stated as a prime-based rate, typically "P – a fixed margin", for example "P – 2.25%". If the uncapped HIBOR + spread would exceed that prime-based rate, you pay the cap instead. In practice, the cap means your rate never goes above a certain percentage of prime, no matter how high HIBOR climbs.

How the cap works in practice: Suppose your H-plan is H+1.25% with a cap of P–2.25%. If the bank's prime rate is 5.875%, the cap is 3.625% (5.875% – 2.25%). If one-month HIBOR is 1.5%, your uncapped rate is 2.75% (1.5% + 1.25%), which is below the cap, so you pay 2.75%. If HIBOR jumps to 4%, your uncapped rate would be 5.25%, but the cap limits you to 3.625%. You never pay more than the cap, but you always pay less when HIBOR is low.

Most banks let you choose the HIBOR tenor — typically one-month or three-month — and the rate resets at that interval. One-month HIBOR is the most common because it tracks short-term liquidity most closely.

How prime-based pricing works

Prime rate (often called "P") is each bank's own benchmark lending rate. It changes only when the bank decides to move it, usually in response to the US Federal Reserve's rate decisions and Hong Kong's interbank conditions. A P-plan is quoted as P – a fixed margin, for example "P – 2.25%". If prime is 5.875%, that gives you a rate of 3.625%.

The key difference: a P-plan's rate does not reset automatically. It stays at P – margin until the bank changes prime. When prime rises, your rate rises by the same amount; when prime falls, your rate falls. Historically, prime moves less often and in larger increments (typically 0.125% to 0.25% at a time) compared with HIBOR's daily fluctuations.

Because prime is always higher than HIBOR during normal market conditions, a P-plan's starting rate is usually higher than an H-plan's. The trade-off is predictability: your rate changes only when the bank acts, not every month.

Why most borrowers choose an H-plan with a prime cap

Since the cap on an H-plan is itself a prime-based rate, the H-plan gives you the best of both worlds: you benefit from low interbank rates most of the time, and you are protected by a prime-based ceiling when rates spike. Over the past decade, one-month HIBOR has been below prime for the vast majority of months, meaning H-plan borrowers have paid less than P-plan borrowers for the same margin.

Banks also compete aggressively on H-plan spreads and cap margins. A typical H-plan today might offer H+1.2% with a cap of P–2.25%, while a P-plan might offer P–2.25% flat. Because H+1.2% is usually lower than P–2.25% when HIBOR is normal, the H-plan is cheaper — and the cap ensures it never becomes more expensive than the P-plan.

There is one scenario where a P-plan can be better: if you value absolute certainty about your maximum rate and you believe HIBOR could stay elevated for a long period. But even then, the H-plan's cap gives you the same maximum as the P-plan, while offering lower payments when HIBOR falls.

Cash rebates and what they really cost

Banks offer cash rebates (sometimes called "cash back") to attract borrowers. A typical rebate is 1% to 2% of the loan amount, paid shortly after drawdown. A HK$5 million loan with a 1.5% rebate gives you HK$75,000 in cash.

Rebates are not free money. The bank recovers the cost through a higher spread or a less favourable cap margin, and through penalty clauses. A loan with a large rebate almost always carries a longer penalty period — typically two to three years — during which you must pay a penalty if you repay early or refinance. The penalty is usually a percentage of the outstanding principal, often 2% in year one, 1.5% in year two, and 1% in year three.

If you plan to sell the flat or refinance within three years, a high-rebate loan may cost you more in penalties than you received in cash. Always compare the net effect: rebate minus expected penalty, plus the difference in interest payments over the period you hold the loan.

Penalty periods for early repayment

Every mortgage in Hong Kong has a penalty period, typically two to three years from drawdown. During this period, early repayment (partial or full) triggers a fee. Common structures:

• Year 1: 2% of the amount repaid
• Year 2: 1.5%
• Year 3: 1%
• After year 3: no penalty

Some banks waive the penalty if you sell the property, but check the terms — "sale waiver" is not universal. If you are buying a new development with a long completion timeline, the penalty period may start from the date of the first drawdown (often the first progress payment), not from the final handover.

Why the headline rate is not the whole comparison

Two loans can have the same headline rate — say H+1.25% with a P–2.25% cap — but differ significantly in total cost because of:

• The spread and cap margin: A loan with H+1.2% and cap P–2.25% is cheaper than H+1.3% with cap P–2.15%.
• The HIBOR tenor: One-month HIBOR and three-month HIBOR are not the same; three-month is usually slightly higher.
• The prime rate used: Different banks have different prime rates. Bank A's prime may be 5.875% while Bank B's is 6.0%. A cap of "P–2.25%" on Bank B's prime is a higher absolute cap.
• Cash rebate and penalty: A loan with a 2% rebate and a three-year penalty is not the same as a 1% rebate with a two-year penalty, even if the interest rate is identical.
• Legal fees and valuation fees: Some banks subsidise these; others pass them on.

To compare properly, ask each bank for a mortgage offer letter that states the exact spread, cap, prime rate, rebate percentage, penalty schedule, and any fee waivers. Then calculate the total cost over the period you expect to hold the loan — typically three to five years — including all fees and the net rebate after penalties.

What to check or do next

Before you commit:

• Confirm the bank's current prime rate and one-month HIBOR. These change, so ask for the figures on the day you receive the offer letter.
• Ask whether the cap is a "permanent cap" (applies for the full loan term) or an "introductory cap" (applies only for the first year or two). Most Hong Kong mortgages have a permanent cap, but verify.
• Get the penalty schedule in writing. Ask specifically: is the penalty waived if you sell the property? Is it calculated on the outstanding principal or the original loan amount?
• Compare at least three banks. The spread and cap margin vary by bank and by your profile (income, property value, relationship with the bank).
• If you are buying a flat under construction, check when the penalty period starts — it may begin with the first progress payment, not the final handover.
• Read the HKMA's latest mortgage measures. As of 16 October 2024, the maximum loan-to-value ratio is 70% for all residential property, the debt servicing ratio limit is 50%, and the stress test requirement is suspended. These limits affect how much you can borrow regardless of which rate plan you choose.