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text: ren zeping team

introduction

if the interest rates of existing mortgage loans can be lowered, it will greatly reduce the burden on residents and boost market confidence. many residents cannot afford the 38 trillion yuan mortgage loans involved. it is a great good to respond to the public's call.

in december 2023, we proposed "three ways to save the real estate industry" (referencethree ways to save real estate), and has repeatedly called for continued interest rate cuts, including lowering the interest rates on existing mortgage loans for second homes.

since 2024, the interest rate gap between existing and new mortgage loans has continued to widen, the phenomenon of residents repaying loans early and being forced to default on loans has increased, and calls for lowering the interest rates on existing mortgages have grown louder.

in 2023, the first round of interest rate cuts on existing mortgage loans had obvious effects, but policy space still exists.on august 31, 2023, the people's bank of china and the state financial supervision and administration bureau jointly issued the "notice on reducing the interest rate of existing first home loans", which clearly stated that eligible existing first home borrowers can negotiate with the lending financial institutions to reduce the interest rate. in july 2024, the central bank issued the "china regional financial operation report (2024)", which reviewed the policy effects of the reduction of existing mortgage interest rates in 2023 in a special form.

in 2024, expectations of a reduction in interest rates on existing mortgage loans will resurface.at the work conference in the second half of 2024, the people's bank of china proposed to "shift the focus more to benefiting people's livelihood and promoting consumption". since august 2024, the people's bank of china has mentioned in public interviews that it will "promote a steady decline in corporate financing and resident credit costs" and "study reserve increment policy measures". the emergence of many policy signals has once again aroused the market's attention to the reduction of existing mortgage interest rates.

necessity of lowering existing mortgage rates increases，it will help residents reduce the pressure of loan repayment and overcome temporary difficulties. for banks, it can reduce the interest loss caused by early loan repayment and help them retain high-quality customers. as interest rates continue to fall, the gap between the stock mortgage interest rate a few years ago and the current interest rate is more than 20%.

based on a 30-year mortgage loan of 1 million yuan and equal principal and interest repayments, we estimate that a 60bp-80bp reduction in the existing mortgage interest rate can reduce the borrower's monthly payment by approximately 340-450 yuan, saving 7%-9% of the monthly payment and total repayment amount.

how might the interest rates of existing mortgage loans be reduced? 1) in 2023, it will be done directly, i.e. by changing the contract terms. whether this round of mortgage transfers can be made across banks in 2024 is still subject to the introduction of specific plans. 2) this round of reductions in the interest rates of existing mortgage loans is expected to be 60-80bp, saving the people 228 billion yuan to 304 billion yuan in interest expenses. 3) it is unlikely that the interest rates of first and second mortgage loans will be fully reduced. it is expected to be a step-by-step, differentiated reduction, and a pilot reduction in the interest rates of second-hand mortgage loans may be implemented.

it is recommended to speed up the release of plans and details to reduce the interest rates of existing mortgage loans. at the same time, policy incentives should be given to banks that reduce the interest rates of existing mortgage loans, such as targeted reserve requirement ratio cuts and subsidies for structural monetary policy tools.

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1. the interest rate gap between existing and new mortgage loans is large, the income and employment situation is severe, and the phenomenon of residents repaying their loans in advance has increased.

1. the decline in lpr and the decline in the add-on have resulted in a large gap between the interest rates of existing mortgage loans and those of new mortgage loans.there are two main ways to price personal mortgage interest rates: fixed interest rate model and "lpr + additional points" floating interest rate. if the buyer chooses a floating interest rate, the loan interest rate will generally be adjusted on the "repricing date" agreed in the contract. the adjustment content is lpr, and the additional points part generally remains unchanged during the contract period.

on the one hand, the continuous decline in lpr has led to a difference between the interest rates for previous home buyers and the interest rates for current home buyers.from october 2019 to august 2024, the lpr will be reduced by 100 basis points from 4.85% to 3.85%.

on the other hand, the amount of existing mortgage loans has increased a lot, while the amount of new mortgage loans has decreased instead of increased.the difference between the existing and new mortgages also widened the interest rate spread between existing and new mortgages. since the "517 new policy" in 2024, various cities have successively cancelled or significantly lowered the lower limit of mortgage interest rates. in addition, since the beginning of the year, the lpr for 5 years and above has been reduced by 35bp cumulatively, and the interest rate of new mortgages has officially entered the "3 era", and the interest rate spread between new and old mortgages has rapidly expanded. take my country's key cities beijing, shanghai, and shenzhen as examples.

shanghai: from july 24, 2021 to december 14, 2023, the lower limit of first-home mortgage loans in shanghai will always be lpr+35bp.this is 80 basis points higher than the latest interest rate floor after the 5.17 new policy.。

shenzhen: from october 8, 2019 to september 28, 2023, the lower limit of the first mortgage rate in shenzhen will always be lpr+30bp.this is 75 basis points higher than the latest interest rate floor after the 5.17 new policy.

beijing: from october 8, 2019 to december 14, 2023, the lower limit of the first mortgage rate in beijing will always be lpr+55bp.it is 100 basis points higher than the latest interest rate floor after the june 26 new policy.

2. the adverse effects brought about by changes in the external environment have increased, domestic effective demand is insufficient, economic recovery has slowed down, and residents' employment and income expectations are unstable, which has led to a tendency to reduce debt and interest expenses.china's economy slowed down in the second quarter, with gdp in the second quarter actually growing by 4.7% year-on-year, down 0.6 percentage points from the first quarter; and growing by 0.7% month-on-month, down 0.8 percentage points from the first quarter. residents are uncertain about their future employment and income expectations.

according to the central bank's urban depositor questionnaire survey, in the second quarter of 2024, residents' future income perception index and income confidence index fell by 1.3 and 1.4 percentage points respectively. the employment perception index fell by 1.4 percentage points from the first quarter, and 48.1% of residents believed that "the situation is severe and it is difficult to find a job" or "it is uncertain". due to the decline in employment and income expectations, residents tend to reduce investment and consumption, increase deposits, and reduce liabilities, thus choosing to repay existing loans in advance.

the reduction in interest rates on existing mortgage loans directly benefits residents. for banks, it can reduce interest losses caused by early repayment of loans, helping banks retain high-quality customers.

from the perspective of residents, the reduction in interest rates on existing mortgage loans will help ease the debt repayment pressure of existing mortgage holders, reduce the phenomenon of early repayment of existing loans, increase residents' disposable income, boost consumer confidence, and drive the growth of total social demand.

according to the china regional financial operation report (2024), the interest rate of existing mortgage loans will be reduced in 2023, reducing the interest expenses of borrowers by about 170 billion yuan each year, which will play a significant role in reducing early loan repayments and boosting consumption growth. a survey by the chongqing branch of the people's bank of china showed that more than 30% of the residents surveyed planned to use the saved interest expenses to increase consumption.

assuming that the interest rates of existing mortgage loans in this round drop to the latest lower limit of the interest rates for issued mortgage loans, the adjustment range of existing interest rates in some cities may reach up to 100bp.based on a 30-year mortgage loan of 1 million yuan and equal principal and interest repayments, it is estimated that a 60bp-80bp reduction in the existing mortgage interest rate can reduce the borrower's monthly payment by approximately 340-450 yuan, saving 7%-9% of the monthly payment and total repayment amount.

from the perspective of banks, they currently urgently need to solve the problem of increasing interest losses caused by the increase in early loan repayments. lowering the interest rates on existing mortgage loans may be a reasonable solution. thinner profits are better than profit losses. a reasonable plan to lower the interest rates on existing mortgage loans will help banks retain high-quality customers.

3. how might the interest rates on existing mortgage loans be reduced in this round?

the last round of reduction in interest rates on existing mortgage loans is not the end, and there is still room for further policy implementation.on august 31, 2023, the people's bank of china and the state financial supervision and administration bureau jointly issued the "notice on matters concerning reducing the interest rates on existing first home loans", which clearly stipulates that eligible existing first home borrowers can negotiate with the lending financial institution to lower the interest rate.first, the interest rate level of newly issued loans is determined by independent negotiation between financial institutions and borrowers, lacking an accurate "top-down" reduction range.；second, the markup on the lpr for newly issued loans must not be lower than the policy floor of the first home loan interest rate in the city where the original loan was issued. for cities where the interest rate markup is higher when mortgage loans are issued, the room for downward adjustment is even more limited. third, after the interest rate on existing mortgage loans is lowered in 2023, according to the people's bank of china's 2023q4 monetary policy implementation report, the adjusted weighted average interest rate on existing loans has dropped to 4.27%, but it is still about 82 basis points higher than the weighted average interest rate of new mortgage loans in 2024q2 of 3.45%.

1. reduction range: expected to be 60-80bp, saving people’s interest expenditure of 228 billion yuan to 304 billion yuan.according to the china regional operation report 2024, the average reduction in the interest rate of existing mortgage loans in september 2023, the last round, was about 73 bp. however, according to data released by the state financial regulatory bureau, the net interest margin of commercial banks in the second quarter of 2024 was 1.54%, which was already at a relatively low level, significantly lower than the 1.74% level in the second quarter of 2023. it is expected that the reduction in this round will be in the range of 60-80 bp.

according to the central bank's second quarter statistical report on the loan allocation of financial institutions, at the end of the second quarter of 2024, the balance of personal housing loans in my country was 37.8 trillion yuan.it is estimated that the total amount of existing mortgage loans in my country is about 3.8 trillion yuan. if the interest rate of existing mortgage loans is reduced by 60bp-80bp, mortgage borrowers will save 228 billion yuan to 304 billion yuan in interest expenses each year.

2. adjustment reduction method: the direct method is to change the contract terms, and the indirect method is to "replace the old with the new".change the contract terms, that is, the bank and the home buyer negotiate independently to change the contract content to reduce the interest rate. in september 2023, the last round was to reduce the additional points and invalidate the higher interest rate, and change it to the new mortgage interest rate. the other is "new for old", that is, loan replacement and "mortgage transfer", where the home buyer reapplies for a housing loan and repays the previous high-interest mortgage at the same time. at present, whether it is possible to "transfer mortgages" across banks is still uncertain and a specific plan is urgently needed.

3. scope of reduction: it is unlikely that the interest rates of existing mortgage loans will be reduced across the board. a step-by-step, differentiated reduction is expected, while a pilot program will be implemented to reduce the interest rates of existing mortgage loans for second-hand homes.based on the precedent of lowering the interest rates on existing mortgages in 2008, when commercial banks introduce details of lowering the interest rates on existing mortgages, it is unlikely that they will make a comprehensive reduction for all borrowers, and the reduction policy may be tilted towards high-quality customers; and previously in september 2023, the reduction in interest rates on existing mortgages only involved the first home, and the interest rates on second home loans were not adjusted. in the future, the scope of reduction in interest rates on existing mortgages is expected to be expanded to second homes.

4. adjustment time: it is expected that major banks will need some time to make adjustments.based on the experience of 2008, after the central bank announced the new policy in october 2008, some banks did not make adjustments until early 2009, implementing preferential interest rates for existing mortgage loans in some regions. it still takes some time from the policy being proposed to its implementation.

5. institutions for reduction: banks with a small proportion of personal mortgage loans and a larger net interest margin may be the first to try it out.the proportion of mortgage loans and the level of net interest margin are two major factors that affect the motivation of banks to reduce the interest rates of existing mortgage loans. the higher the proportion of mortgage loans, the greater the negative impact of lowering the interest rates of existing mortgage loans on banks. the smaller the net interest margin, the lowering of the interest rates of existing mortgage loans will further compress the space for net interest margin.

banks can reduce the interest rates of existing mortgage loans in a step-by-step and differentiated manner. in response to the trend of early loan repayment, it is an inevitable trend to reduce the interest rates of existing mortgage loans.banks should issue specific plans and supporting rules as soon as possible to clarify the requirements and procedures of the two reduction methods, such as stipulating the size of customer assets and restricting borrowers from making early repayments. the interest rates of existing mortgage loans can be reduced in a differentiated manner. for example, for existing mortgage loans with interest rates still higher than 4.5% on september 30, 2024, different levels can be set and differentiated preferential policies can be given.

policy incentives will be given to banks that lower the interest rates on existing mortgage loans.lowering the interest rate on existing mortgage loans will lead to interest losses for banks, and banks, especially those with a high proportion of mortgage loans, will lack motivation. it is recommended to support banks with a high proportion of mortgage loans to increase bank polarity. for example, window guidance should be given to state-owned banks and joint-stock banks with large mortgage loan scales, and state-owned banks should be encouraged to play a leading role.banks that actively lower the interest rates on existing mortgage loans can be given targeted reserve requirement ratio reduction support.provide subsidies in the form of real cash and establish structural monetary policy tools to provide banks with equal or partial subsidies for interest losses caused by lowering the interest rates on existing mortgage loans.