China’s commercial banks are questioning whether the central bank’s recent cut in outstanding mortgage rates will do enough to curb mortgage prepayments and protect bank margins.
The People’s Bank of China (PBOC) last month released new guidelines requiring commercial banks to lower interest rates on unsecured loans for first mortgages. The new rates, which take effect on September 25, aim to encourage consumption and reduce the incentive for households to pay off their mortgages early, reducing bank profits.
A PBOC spokeswoman told local media on Wednesday that “lowering senior mortgage rates will help ease the interest burden on households,” adding that the new rules will help lower prepayments and improve family planning and consumer confidence. .
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The measure has caused at least some homebuyers to reconsider mortgage downpayments.
In the year Officers stand guard in front of the headquarters of the People’s Bank of China in Beijing on September 30, 2022. Photo: Reuters alt= In Beijing on September 30, 2022. Photo: Reuters>
Kang Chao, an insurance company worker in Changsha, southeast China’s Hunan province, told The Post that a new mortgage rate of 4.2 percent would help his family spend 1,700 yuan ($234) a month to cover living expenses.
“[My wife] And I both took a mortgage loan in 2018 and 2019, when the interest rates reached 5.15%, “Every month, we have to pay about 9,800 yuan, which is not more than 3,000 yuan. Spend on everything else.
“So, especially after we had a baby, we were under a lot of pressure to pay off our debt quickly. At one point, we were thinking of selling one of our houses. Now that the new policy is out, we feel a little relieved.”
China’s central bank has been cutting mortgage rates on new loans since last year to boost home sales. But the policy is moving Advance payments are encouraged As home buyers, burdened with expensive loans from previous years, they dip into their personal savings and start applying for cheaper loans. Pay off relatively expensive loans. Earlier.
An estimated $700 billion in mortgages, representing 12 percent of the nation’s mortgage balances, have been prepaid by 2022, analysts said.
According to analysts, China’s commercial banks could see a decline of up to 5 percent in revenue this year if the prepayment wave continues. However, even if banks refinance home loans at lower rates, their net profits could fall by 1 to 5 percent, according to a Fitch Ratings report.
Paying off early is a behavior driven by interest rates, and as the gap between new and advanced loan rates narrows, incentives to pay off loans early diminish, said Gary Ng, senior economist for Asia-Pacific Thematic Research at Natixis.
“But that’s not what it means [lowering outstanding mortgage rates] It’s a medicine to boost Chinese household confidence in assets,” he said. “The confidence issue is complex, and it will take more than devaluation to fix. Although paying off early is easier, mortgage growth is unlikely to see a significant jump.
A banking analyst at the Beijing Commercial Bank branch told the Post that a “significant reduction” in down payments is unlikely in the short term, as many homebuyers still want to reduce their financial debt amid the economic downturn.
“The benchmark interest rate is now 4.5 percent, which is higher than the returns from wealth management products in the market,” said the source, who did not want to be named because he was not authorized to speak to the media. “People who have cash on hand will definitely want to pay off their loans early.”
When investing in the stock market or wealth management products – where you can use the money to pay off a loan – you can earn up to 30 percent, she says things have changed “since the olden days”.
“Many of these products are tied to real estate investment trusts, where the investor’s money is used to fund projects managed by private property developers,” she said. But now that there is a crisis in China’s property market, these high-risk, high-return investment options are no longer available.
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