China’s commercial banks are raising questions about whether the central bank’s recent cut to outstanding mortgage rates will be sufficient to hold back a flood of mortgage prepayments and help protect bank margins.
The People’s Bank of China (PBOC) unveiled new guidance last month requiring commercial banks to lower interest rates on outstanding mortgages for first-home loans. The new rates, which will be effective starting on September 25, aimed at stimulating consumption while also reducing the incentive for households to pay down their mortgages early, which had led to a decline in bank profits.
“Lowering outstanding mortgage rates will help alleviate the interest burden on households,” a spokesperson for the PBOC told local media on Wednesday, adding that the new rules have already led to a decline in prepayments, and will help improve household balance sheets and consumer confidence.
The measure has led at least some homebuyers to reconsider their mortgage prepayments.
Kang Chao, an insurance company employee in Changsha, in southeast China’s Hunan province, told the Post that a new mortgage rate of 4.2 per cent could help his family free up about 1,700 yuan (US$234) each month to cover living expenses.
“[My wife] and I both took out mortgage loans in 2018 and 2019, when the interest rates were as high as 5.15 per cent,” he said. “Each month, we need to pay about 9,800 yuan, and this leaves us no more than 3,000 yuan to spend on everything else.
“So we were under a lot of pressure to pay off our debt quickly, especially after we had a child. At one point, we were even considering selling one of our houses. Now that the new policy is out, we feel somewhat relieved.”
An estimated US$700 billion in mortgages, representing around 12 per cent of the country’s total mortgage balance, has been prepaid since 2022, according to analysts.
China property support spurs buying but sceptics warn of weak demand
China property support spurs buying but sceptics warn of weak demand
Chinese commercial banks could see an earnings decline of up to 5 per cent this year if the prepayment wave persists, according to analysts’ estimates. However, if banks refinance home loans at lower rates, their net profits could also drop by 1 to 5 per cent, a report by Fitch Ratings said.
Early repayment is a behaviour driven by interest rates, and as the gap between new and outstanding mortgage rates narrows, the incentive to pay down mortgages early will start to decrease, said Gary Ng, senior economist for Asia-Pacific thematic research at Natixis.
“However, it does not mean [lowering outstanding mortgage rates] is a panacea for boosting China’s household confidence in properties,” he said. “The confidence issue is complex, and it will take more than rate cuts to repair. Although early repayment will ease, mortgage growth is not likely to see a significant jump.”
A banking analyst at the Beijing branch of a commercial bank echoed this…
