Saturday, August 05, 2006

A meaningful saving

I have belatedly realised that I can reduce the interest rate on two of my mortgages at no cost and very little risk by taking advantage of the yield curve.

The mortgages are linked to HIBOR (Hong Kong Interbank Offer Rate). These are floating rate mortgages (as is usual in Hong Kong). The interest rate is periodically fixed to HIBOR (plus a margin of 0.8% or 0.7%). The default option is based on the three month HIBOR rate. Every three months it rolls over at a new rate of interest based on the prevailing three month HIBOR rate. My last fixing resulted in an interest rate of 5.1045% (being three month HIBOR of 4.3045% plus 0.8%).

However, I do not have to accept the default option of using three month HIBOR. I can choose any available HIBOR term that I want. Interest rates in Hong Kong are currently showing a normal yield curve which means that shorter term rates are lower than longer term rates. The shorter the HIBOR option I elect the lower the interest rate. If I elect one month HIBOR instead of three month HIBOR I will end up paying an annualised interest rate which is (currently) about 0.44% less than I am currently paying. On both an annualised basis and over the remaining lives of the mortgages, the savings are meaningful.

The risks of being worse off if I elect one month fixings instead of three month fixings are both small and remote. When these mortgages next come up for fixing (in September and October) I will refix using one month HIBOR and count the savings.

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