Poon, 33, tried again in May and got a loan covering 70 percent of the price for the 700-square-foot (65-square-meter) apartment in Hong Kong's Sai Wan Ho district from BOC Hong Kong (Holdings) Ltd. The mortgage rate was 2.25 percent, down from the 3.5 percent that Poon was discussing with lenders last year.

Mortgage rates in the city are the lowest in at least 19 years, as far back as records are available, to offset slower demand for other types of credit during Hong Kong's worst recession in a decade. Among developed economies, only Japan offers similarly cheap loans, as its central bank has kept interest rates below 1 percent for the past 14 years, said Leland Sun, founder of Pan Asian Mortgage Co.

"Hong Kong banks are killing themselves with the low rates," said Sun, whose Hong Kong-based firm advises homebuyers.

Average net interest margins for the city's banks -- the difference between what they charge for loans and the cost to fund them -- will narrow by as much as half a percentage point this year from 2008, said Lee Yuk-kei, an analyst at Core-Pacific Yamaichi International Ltd. in Hong Kong.

The aggregate margin declined to 1.62 percent in the first quarter from 1.78 percent in the previous three months, the Hong Kong Monetary Authority reported. At New York-based JPMorgan Chase & Co., the largest U.S. bank by market value, the net interest margin climbed 37 basis points to 2.76 percent in the first quarter, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

Banco Santander SA, Spain's largest bank, said its net interest margin rose to 3.34 percent in the first quarter from 3.05 percent three months earlier.

Thinner margins will slow any recovery in Hong Kong bank profits this year, Core-Pacific's Lee said. First-half results "are likely to be weak" because of pressure on loan profitability and weakening demand for credit, Citigroup Inc. analysts Simon Ho and Franco Lam wrote in a June 16 report.

The combined pretax profits of Hong Kong banks declined 28 percent in the first quarter from a year earlier, according to figures submitted last month by the central bank to lawmakers. By contrast, first-quarter earnings at JPMorgan and Citigroup in the U.S. and Deutsche Bank AG in Germany increased amid lower credit- market writedowns and higher trading profits.Total loans in Hong Kong fell 0.5 percent in April from March, sliding for a seventh straight month as an increase in mortgage lending failed to compensate for a drop in demand for credit among individuals and small- and medium-size companies, according to the central bank. The value of mortgage loans approved by Hong Kong banks rose for a sixth consecutive month in May to HK$28.1 billion, the highest since January 2008.

Banks cut home-loan rates in the city by 15 to 40 basis points in May to an average 2.08 percent, data compiled by Hong Kong-based mReferral Mortgage Brokerage Services show. That's the lowest level since records began in 1990, according to mReferral.

"With these kinds of mortgage rates, banks aren't really making much money," said Dominic Chan, a Hong Kong-based analyst at BNP Paribas Securities Asia Ltd.

The yield on 10-year Treasuries fell to 3.54 percent on June 26 in New York.

Chan has a "buy" rating on BOC Hong Kong Holdings Ltd., Bank of East Asia Ltd. and HSBC Holdings Plc, and a "hold" on Hang Seng Bank Ltd.

The Hang Seng Finance Index, which tracks shares of the city's biggest lenders, fell 17 percent during the past 12 months, matching the benchmark Hang Seng Index's performance. The finance gauge advanced 0.22 percent Monday at 10:31 a.m. local time.

Bank of Communications Co., the Chinese bank 19 percent owned by London-based HSBC, started offering mortgage rates on June 10 priced at as much as 3.25 percentage points below its prime rate, which stands at 5.25 percent. The prime rate is the benchmark banks use to calculate what to charge for mortgages.

HSBC, Hong Kong's biggest bank by branches, began a new mortgage plan in March offering a fixed 2.18 percent interest rate in the first year and a floating rate of 1.75 percent below the prime rate thereafter. BOC Hong Kong, which has the largest share of the mortgage market, announced a similar plan later that month, with rates as low as 2.16 percent the first year.