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By Xia Bin

The interest rates on existing mortgage loans are expected to be reduced.

On the 22nd, the People's Bank of China announced that the loan market benchmark rate (LPR) is: 3.35% for 1-year LPR and 3.85% for 5-year and above LPR. This means that both 1-year and 5-year and above LPRs have dropped by 10 basis points simultaneously.

In addition to new loans, this interest rate cut also benefits existing mortgage loans. The interest rates of existing home buyers will be reduced accordingly, and monthly payments will drop slightly.

Multiple factors push LPR down

Wen Bin, chief economist of China Minsheng Bank, believes that the 10bp reduction in the LPR quotation in July may be due to multiple factors, as the 7-day reverse repurchase rate was lowered and the MLF rate remained stable.

First, follow the reduction of the 7-day reverse repurchase rate and gradually transmit it to the real economy through the financial market. Second, under the weak financing demand, it is necessary to balance the moderate expansion of quantity with the downward trend of price. Third, reduce the interest rate of existing loans, ease the pressure of early mortgage repayment, and stabilize residents' credit. Fourth, improve the quality of loan quotations, reduce deviations, and better reflect market supply and demand. Fifth, stop "manual interest supplements" and other measures to drive the improvement of bank liability costs and create a certain space for the reduction of LPR.

Pang Ming, chief economist and head of research at JLL Greater China, said frankly that a package of measures to optimize and adjust real estate policies were introduced intensively in the early stage, especially the cancellation of the lower limit of the interest rate policy for commercial personal housing loans for the first and second homes at the national level. The latest data showed that a number of major real estate indicators improved in June and market activity increased, but the market is still adjusting at the bottom.

"Against this background, lowering the five-year LPR will help continue to guide and encourage governments at all levels to choose appropriate policy tools in a step-by-step, flexibly and differentiated manner based on local realities, optimize and adjust policy measures in a timely manner, promote the smooth operation of the real estate market, and better meet residents' reasonable housing needs." Pang Ming said.

Existing mortgage loans can enjoy benefits

On May 17, the People's Bank of China cancelled the national mortgage rate policy floor, and the interest rate of newly issued mortgages has dropped significantly. Data shows that in June, the national average interest rate of newly issued mortgages was 3.45%, down 66 basis points year-on-year and 17 basis points month-on-month, at the lowest level in history.

Wen Bin pointed out that, except for Beijing, Shanghai and Shenzhen (the lower limit for the first mortgage is LPR-45 basis points), the rest of the cities in the country have cancelled the lower limit of mortgage interest rates. Recently, the interest rates for first mortgage loans in many places have continued to fall, with the lowest in Guangzhou, Nanjing and other cities falling to 3%, and the interest rate spread with the existing mortgage interest rate has further widened. Affected by this, the willingness to repay mortgages early has risen again, causing a significant disturbance to the net increase in residents' medium and long-term loans.

In this context, lowering the LPR will lead to a repricing of mortgage rates at the beginning of next year, which can alleviate residents' willingness to repay early and stabilize residents' credit. The LPR rate cut will also benefit existing mortgage loans.

Industry experts pointed out that since the beginning of this year, the LPR for more than 5 years has dropped by 35 basis points. After the next reset date, existing mortgage borrowers will also benefit from the LPR drop, reducing their interest burden and enhancing their consumption capacity. Based on a mortgage principal of 1 million yuan, a term of 30 years, and equal principal and interest payments, the monthly interest expenditure can be saved by about 200 yuan, and the total interest can be saved by more than 70,000 yuan.

The impact of LPR decline on banks' net interest margin is controllable

In order to prevent the behavior of attracting deposits with high interest rates, maintain market competition order, and strive to stabilize liability costs, in April this year, the market interest rate pricing self-discipline mechanism issued the "Initiative on Prohibiting the Use of Manual Interest Subsidies to Attract High-Interest Deposit and Maintain the Competitive Order of the Deposit Market", requiring all banks to complete rectification before the end of April.

Wen Bin said that by the end of the second quarter, commercial banks had already fully cleaned up the manual interest supplement for corporate deposits. As the scale of previously super-self-disciplined deposits accounted for a large proportion and the interest rate was high, as banks further implemented rectification under the strict regulatory environment, stopping "manual interest supplement" had a relatively obvious effect on improving the deposit interest rate.

"After the rectification of illegal manual interest payments, banks' funding costs have been steadily declining, and the impact of the LPR decline on banks' net interest margins is controllable." Industry experts believe that the decline in LPR this month is partly attributed to the effect of the previous regulatory authorities' rectification of illegal manual interest payments, which has resulted in banks' funding costs being reduced ahead of schedule.

It is reported that after rectifying the illegal manual interest payment, the interest expenses saved by the bank in the short term are close to the effect of reducing the deposit interest rate once. After the deposit interest rate is reduced, the existing deposits will be gradually repriced when they mature, and the effect will gradually appear. However, the reduction in interest expenses brought about by rectifying the illegal manual interest payment is immediate.

Many national banks reported that after rectifying the illegal manual interest payments, their deposit interest rates in June, especially those on corporate deposits, have dropped significantly compared with April, and their net interest margin has rebounded.

"Therefore, it is expected that the impact of this LPR decline on bank net interest margin and bank profits will be controllable, and the impact on shareholders' equity of listed banks will also be relatively small." Industry experts also mentioned that the effectiveness of the market-oriented adjustment mechanism for deposit interest rates is still being released, and it is expected that banks will reasonably adjust deposit interest rate levels according to changes in market interest rates, which will also be conducive to the stability of net interest margins.

Source: National Express

Editor: Zhuge Ruixin

Editor: Wei Xi