Analyst States: China's Housing Market Supported by Cut in Mortgage Rates
Adjusting mortgage rates for existing personal home loans in a lawful, steady, and orderly manner could better support the stable and healthy development of the real estate market, prevent homeowners from repaying loans ahead of schedule, and ensure the banks' operations and stability. This approach could help mitigate risks linked to interest rates, credit, deflation, and legal violations, alleviate repayment pressure, reduce loan costs for homeowners, enhance household balance sheets, and boost residents’ consumption capacity and willingness.
TroibNews 
**Editor's note:** Bruce Pang is chief economist and head of research for Greater China at JLL. The article represents the author's opinions and not necessarily the views of CN. It has been translated from Chinese and edited for brevity and clarity.
China's central bank plans to reduce mortgage rates for existing home loans by approximately 0.5 percentage points, aligning them more closely with rates for newly issued loans. This announcement was made by Pan Gongsheng, governor of the People's Bank of China, during a press conference focusing on financial support for high-quality economic development. The minimum down payment ratio for first and second homes will now be standardized at 15 percent.
Since May, the PBOC has lifted nationwide minimum mortgage rate requirements for personal home loans along with other supportive financial measures for the real estate sector. As a result, many cities have seen significant reductions or complete removals of the lower limits on mortgage rates for existing first and second home loans, allowing financial institutions to set rates independently for their clients.
Data highlights that, as of the end of June, the weighted average mortgage rate for newly issued personal home loans across the nation was 3.45 percent, reflecting a decrease of 0.66 percentage points compared to the previous year. Coupled with the cumulative 35 basis points cuts to the over-five-year Loan Prime Rate in February and July, the disparity between existing and newly issued home loan rates has increased, with some cities showing gaps exceeding 100 basis points.
This considerable divergence in interest rates prompts many borrowers to consider early repayment opportunities. Influenced by this gap and their financial circumstances, numerous mortgage holders have sought to refinance through early repayments or by taking out consumer or business loans. Consequently, banks have experienced high rates of early repayments and declining home loan balances, disrupting banking operations and credit services.
Given the expanding interest rate differences, there is potential for lowering mortgage rates on existing home loans. Adjusting these rates legally and orderly could better support a stable and healthy real estate market, discourage premature loan repayments, and stabilize bank operations. Such measures could alleviate the risks associated with interest rates, credit issues, deflation, and legal violations, while reducing repayment pressures and overall costs for homeowners, ultimately improving household financial stability and boosting consumption.
A pertinent example from August 2023 illustrates this well. After the PBOC and the National Financial Regulatory Administration recommended reducing mortgage rates for existing first-home loans, borrowers gained the ability to either replace existing loans with new ones or adjust current mortgage rates, alleviating financial pressure. Changes were made to mortgage rates for over 23 trillion yuan worth of existing loans, leading to an adjusted weighted average rate of 4.27 percent—down 0.73 percentage points on average. This adjustment benefited more than 50 million households, resulting in annual savings of approximately 170 billion yuan in interest payments. Following this policy's implementation, early repayment amounts fell by 10.5 percent, contributing to a significant increase in retail sales growth in the fourth quarter of 2023.
Estimates indicate that if mortgage rates for existing home loans were to be cut by 75 to 100 basis points, a borrower with a 1 million yuan, 30-year mortgage could see monthly payments drop by 400 to 600 yuan. This could equate to savings of about 5 to 7 percent on repayments and lower total interest expenses by 160 billion to 220 billion yuan. However, should banks not adjust their costs or lower deposit rates correspondingly, a 100 basis points decrease in mortgage rates might negatively affect their operating income and net profits by around 6 percent and over 10 percent, respectively, on an annual basis.
According to data from the National Financial Regulatory Administration, the net interest margin for China's commercial banks stood at 1.54 percent at the end of the second quarter. While this remains consistent quarter-on-quarter, it marks a 20 basis points drop from 1.74 percent in the same period last year and is near historical lows. Commercial banks must adeptly address their operational environment, refine their business structures, and counterbalance the impacts of the mortgage rate reductions to stabilize net interest margins.
During this careful and systematic reduction of mortgage rates for existing home loans, prudent comparisons should be made between repricing loans with original banks and refinancing with others. Directly transferring existing mortgages to other banks could lead to market disarray and further rate reductions affecting profit levels. There is ongoing discussion about whether refinancing options should be expanded to include loans for second homes.
Conversely, following market principles and legal frameworks, facilitating the reduction of mortgage rates for existing home loans through direct negotiations between borrowers and original lenders is a stable approach. Potential adjustments could include modifying contract terms or substituting existing loans for new ones with more favorable rates.
Pan Gongsheng also indicated that the reserve requirement ratio will soon fall by 0.5 percentage points, which will inject around 1 trillion yuan of long-term liquidity into the financial system. The central bank will concurrently lower its policy rate, reducing the interest rate of seven-day reverse repurchases by 0.2 percentage points to 1.5 percent. This aims to ensure a synchronized decline in market rates for loans and deposits while maintaining the stability of commercial banks' net interest margins.
Measures such as RRR cuts will further support banks in effectively managing and controlling their liability costs. Additionally, structural monetary policy instruments may be utilized to provide banks that adjust mortgage rates lawfully and orderly with lower-cost, stable funding, enhancing the financial sector’s ability to sustainably bolster the real economy.
Anna Muller for TROIB News
China's central bank plans to reduce mortgage rates for existing home loans by approximately 0.5 percentage points, aligning them more closely with rates for newly issued loans. This announcement was made by Pan Gongsheng, governor of the People's Bank of China, during a press conference focusing on financial support for high-quality economic development. The minimum down payment ratio for first and second homes will now be standardized at 15 percent.
Since May, the PBOC has lifted nationwide minimum mortgage rate requirements for personal home loans along with other supportive financial measures for the real estate sector. As a result, many cities have seen significant reductions or complete removals of the lower limits on mortgage rates for existing first and second home loans, allowing financial institutions to set rates independently for their clients.
Data highlights that, as of the end of June, the weighted average mortgage rate for newly issued personal home loans across the nation was 3.45 percent, reflecting a decrease of 0.66 percentage points compared to the previous year. Coupled with the cumulative 35 basis points cuts to the over-five-year Loan Prime Rate in February and July, the disparity between existing and newly issued home loan rates has increased, with some cities showing gaps exceeding 100 basis points.
This considerable divergence in interest rates prompts many borrowers to consider early repayment opportunities. Influenced by this gap and their financial circumstances, numerous mortgage holders have sought to refinance through early repayments or by taking out consumer or business loans. Consequently, banks have experienced high rates of early repayments and declining home loan balances, disrupting banking operations and credit services.
Given the expanding interest rate differences, there is potential for lowering mortgage rates on existing home loans. Adjusting these rates legally and orderly could better support a stable and healthy real estate market, discourage premature loan repayments, and stabilize bank operations. Such measures could alleviate the risks associated with interest rates, credit issues, deflation, and legal violations, while reducing repayment pressures and overall costs for homeowners, ultimately improving household financial stability and boosting consumption.
A pertinent example from August 2023 illustrates this well. After the PBOC and the National Financial Regulatory Administration recommended reducing mortgage rates for existing first-home loans, borrowers gained the ability to either replace existing loans with new ones or adjust current mortgage rates, alleviating financial pressure. Changes were made to mortgage rates for over 23 trillion yuan worth of existing loans, leading to an adjusted weighted average rate of 4.27 percent—down 0.73 percentage points on average. This adjustment benefited more than 50 million households, resulting in annual savings of approximately 170 billion yuan in interest payments. Following this policy's implementation, early repayment amounts fell by 10.5 percent, contributing to a significant increase in retail sales growth in the fourth quarter of 2023.
Estimates indicate that if mortgage rates for existing home loans were to be cut by 75 to 100 basis points, a borrower with a 1 million yuan, 30-year mortgage could see monthly payments drop by 400 to 600 yuan. This could equate to savings of about 5 to 7 percent on repayments and lower total interest expenses by 160 billion to 220 billion yuan. However, should banks not adjust their costs or lower deposit rates correspondingly, a 100 basis points decrease in mortgage rates might negatively affect their operating income and net profits by around 6 percent and over 10 percent, respectively, on an annual basis.
According to data from the National Financial Regulatory Administration, the net interest margin for China's commercial banks stood at 1.54 percent at the end of the second quarter. While this remains consistent quarter-on-quarter, it marks a 20 basis points drop from 1.74 percent in the same period last year and is near historical lows. Commercial banks must adeptly address their operational environment, refine their business structures, and counterbalance the impacts of the mortgage rate reductions to stabilize net interest margins.
During this careful and systematic reduction of mortgage rates for existing home loans, prudent comparisons should be made between repricing loans with original banks and refinancing with others. Directly transferring existing mortgages to other banks could lead to market disarray and further rate reductions affecting profit levels. There is ongoing discussion about whether refinancing options should be expanded to include loans for second homes.
Conversely, following market principles and legal frameworks, facilitating the reduction of mortgage rates for existing home loans through direct negotiations between borrowers and original lenders is a stable approach. Potential adjustments could include modifying contract terms or substituting existing loans for new ones with more favorable rates.
Pan Gongsheng also indicated that the reserve requirement ratio will soon fall by 0.5 percentage points, which will inject around 1 trillion yuan of long-term liquidity into the financial system. The central bank will concurrently lower its policy rate, reducing the interest rate of seven-day reverse repurchases by 0.2 percentage points to 1.5 percent. This aims to ensure a synchronized decline in market rates for loans and deposits while maintaining the stability of commercial banks' net interest margins.
Measures such as RRR cuts will further support banks in effectively managing and controlling their liability costs. Additionally, structural monetary policy instruments may be utilized to provide banks that adjust mortgage rates lawfully and orderly with lower-cost, stable funding, enhancing the financial sector’s ability to sustainably bolster the real economy.
Anna Muller for TROIB News
