news

한어Русский языкEnglishFrançaisIndonesianSanskrit日本語DeutschPortuguêsΕλληνικάespañolItalianoSuomalainenLatina

people are voting with their feet by paying off their mortgages early

to reduce interest expenses

the topic of adjusting the interest rates of existing mortgage loans has recently sparked heated discussions in the market.

this started with a bloomberg report on august 30. it said that customers could either renegotiate mortgage rates with banks or transfer mortgages across banks, that is, reapply for housing loans from other banks and apply the latest mortgage rates. a subsequent report described more detailed details.

in early september, there was even a false rumor on the internet that china merchants bank app had begun testing the "existing mortgage interest rate adjustment" function in beijing. in fact, this function is aimed at adjusting the interest rates of existing mortgages last year, and many bank apps have similar functions.

despite market expectations, lowering the interest rates on existing mortgage loans is a complex issue involving the interests of multiple parties.

early loan repayment is becoming a "financial management"

people are "voting with their feet" by paying off their loans early to reduce interest payments.

in june this year, the macroeconomic research team of guotai junan calculated the resident early repayment rate (cpr) to quantify the proportion of borrowers who repay their loans in advance within the prescribed period. since 2017, the cpr has basically fluctuated around 20%. since february 2024, this indicator has accelerated upward, reaching a historical high of 37% in april, reflecting a significant increase in residents' early loan repayments.

guotai junan pointed out that before 2021, the main factor for residents to repay their loans in advance was their strong willingness to buy houses, and second-hand houses needed to pay off their loans before trading. in 2022, the central bank lowered the lpr (loan market benchmark rate) for five consecutive years, and the loan interest rate fell to a historical low. the policy of lowering the interest rate of existing mortgage loans has not yet appeared. the decline in the interest rate of new personal housing loans has caused residents to replace their loans. alternative and low-cost loans such as consumer loans and business loans are easy to obtain, which has led to residents repaying their loans in advance.

since 2021, the illegal replacement of mortgage loans with consumer loans and business loans has occurred from time to time. business loans played an important role in the shenzhen "shenfangli" real estate speculation incident that year. today, the interest rates of consumer loans and business loans have even entered the "2-digit" range.

however, according to guotai junan securities, the reason for the latest round of early loan repayments is different from the previous ones, and is mainly driven by the "shortage of high-yield assets." "when there is a lack of other high-yield assets to invest in, residents are motivated to withdraw liquidity from low-yield assets (such as deposits and stocks) and then allocate them to early loan repayments." in other words, when there is a lack of high-yield assets to invest in the market on the one hand, and the interest rates of existing mortgages are still high on the other hand, residents even regard early loan repayments as a kind of "financial management."

wang yifeng, chief analyst of the banking industry at everbright securities, estimated in a research report released in november 2022 that the vast majority of existing mortgage loans were issued after 2014. among them, during the period of high interest rates from 2017 to 2021, the balance of existing mortgage loans accounted for about 73%. at that time, the proportion of existing mortgage loans with a markup of more than 50bp was as high as 64.4%.

although the interest rates of existing mortgage loans have been lowered once according to the policy at the end of august 2023, with an average drop of 75bp, the interest rates of incremental mortgage loans have been significantly lowered in the past year, and the interest rate spread between incremental and existing mortgage loans has widened again.

on may 17, 2024, the people's bank of china announced the adjustment of the commercial personal housing loan interest rate policy and the cancellation of the national lower limit of the commercial personal housing loan interest rate policy for the first and second homes. this is the core content of the "517 new real estate policy".

at present, except for the three first-tier cities of beijing, shanghai and shenzhen, the lower limits of mortgage interest rates for the first and second sets of mortgages in other cities have been cancelled. since the end of 2023, beijing has lowered the lower limit of mortgage interest rates twice. the lower limit of the first mortgage interest rate has been lowered from the previous lpr+55bp to lpr-45bp, and the increase has decreased by 100bp in total. at the end of may, guangzhou, also a first-tier city, announced the cancellation of the lower limit of mortgage interest rates. in addition, in february and july 2024, the central bank twice guided the lpr of 5 years and above to decline by a total of 35bp.

the cancellation or substantial reduction of the floor of mortgage interest rates and the reduction of lpr for 5-year and above have led to an accelerated downward trend in incremental mortgage interest rates. according to data from the central bank, the weighted average interest rate of newly issued mortgages nationwide was 4.11% in the second quarter of 2023, and it has dropped to 3.45% in the second quarter of 2024.

according to calculations by lu ting, chief economist of nomura china, after the average reduction of 73bp in the interest rate of existing mortgage loans in 2023, the current average interest rate of existing mortgage loans is estimated to be around 4.5%, and the spread with the incremental mortgage rate is about 90bp-130bp.

taking beijing's first home loan as an example, the current incremental mortgage rate is 3.4%, while the existing mortgage rate is as high as 4.75%, with a spread of 135bp. the first home loan rates in mainstream cities have generally dropped to the "3-digit" range, and some banks in first-tier cities like guangzhou have even dropped below 3%.

the interest rate spread between new and existing mortgage loans is related to the mortgage interest rate pricing method. there are two main mortgage interest rate pricing methods: one is the fixed interest rate model, and the other is the floating interest rate model consisting of lpr and additional points. according to zou lan, director of the monetary policy department of the people's bank of china, 99% of mortgages are priced using a floating interest rate mechanism.

on june 3, 2024, in changzhou, jiangsu, people consulted about mortgage matters at the housing provident fund management center. photo/china news service

"although mortgage rates have been lowered, the interest rates on existing mortgages are still high. the floating interest rate model can only be adjusted until january next year, and only the part of the lpr reduction this year can be lowered. the added points cannot be adjusted. this leads to the high interest rate characteristics of existing mortgages being very prominent. in addition, the recent rapid decline in deposit rates and wealth management rates has become the root cause of early loan repayment." li yujia, chief researcher at the housing policy research center of the guangdong provincial urban planning institute, told china newsweek.

therefore, after the "517 new property market policy", the margin of each city was significantly reduced, and the spread between new and old mortgages widened again. the current situation is similar to that in mid-2023, when the spread between new and existing mortgages also reached about 100bp.

on august 31, 2023, the people's bank of china and the state financial supervision and administration jointly issued the "notice on matters concerning reducing interest rates on existing first home loans" (hereinafter referred to as the "notice"), which clearly stated that eligible existing first home borrowers can negotiate with the lending financial institutions to lower the interest rate.

today, the interest rate spread between new and existing mortgage loans has been widened to around 100bp again. li yujia believes that the recent reduction in bank deposit rates and the central bank's open market operation rates have also led to a rapid decline in the cost of commercial banks' funds, which has opened up space for a reduction in existing mortgage rates.

however, this time banks are under greater pressure.

banks’ multiple dilemmas

as of the end of june this year, the balance of personal housing loans nationwide was 37.79 trillion yuan, down 2.1% year-on-year, and about 410 billion yuan less than at the end of 2023. the interim report data showed that in the first half of 2024, the balance of personal housing loans of many listed banks such as bank of china, bank of communications, shanghai pudong development bank, and industrial bank decreased. for example, the balance of housing loans of industrial bank decreased by more than 10 billion yuan.

at present, it is not easy to repay the loan early. most banks require a waiting period of one month or even three months to apply for early repayment. some small and medium-sized banks have restrictions on the number of early repayments, and some banks only allow one application per year.

banks hope to delay "early loan repayment" and do not want high-quality assets such as personal housing loans to be lost quickly. lowering the interest rate of existing mortgage loans is believed to help this. however, banks are facing pressure to narrow their net interest margins. every 1bp adjustment in the interest rate of existing mortgage loans means a loss of real money. banks are also facing a dilemma.

according to previous estimates by the china banking research institute, assuming that the interest rate on existing mortgage loans is reduced by 50bp, the bank's net interest margin will decrease by 7bp, operating income will decrease by 3%, and net profit will decrease by 6%. in the second quarter of 2024, the net interest margin of commercial banks was 1.54%, a year-on-year decrease of 20bp, which has fallen to the lowest level since statistics were available.

in other words, unless the deposit cost is reduced by the same amount or even more, banks, especially those with a high proportion of existing mortgage loans, will face greater pressure. in the first half of 2024, the revenue and profits of many banks showed negative growth, which was related to the pressure on net interest margin.

zhou wanfu, deputy president of bank of communications, said that the impact of factors such as the reduction in existing mortgage interest rates in 2023, the "517 new policy" and the two reductions in lpr in 2024 on the bank's net interest margin will continue to be evident in the second half of the year. at the same time, the current trend of regular and long-term deposits has not been alleviated, which has affected the downward trend of liability costs to a certain extent. "from a full-year perspective, our goal is to keep the net interest margin basically stable and strive for marginal improvements. it is difficult and challenging to achieve this."

in short, on the one hand, the interest rates of high-quality assets such as personal housing loans are decreasing, and banks are making less profit; on the other hand, people hope to get more interest through regular and long-term deposits, and banks pay more interest. as a result, bank income and profits are naturally under pressure due to the one-down and one-up.

"everyone is holding on." a person from the personal credit department of a joint-stock bank lamented to reporters.

lowering deposit rates is obviously one way to deal with such pressure. it was also after the reduction of existing mortgage rates last year that deposit rates were reduced, large certificates of deposit were stopped, and manual interest payments were regulated. since september 2022, the six major state-owned banks have reduced deposit rates five times, three of which occurred after the "notice" on reducing existing mortgage rates was issued at the end of august 2023.

take the industrial and commercial bank of china as an example. after the adjustment on july 25 this year, the bank's current deposit interest rate is currently 0.15%; for fixed deposits with lump-sum deposits, the 1-year, 3-year, and 5-year interest rates are 1.35%, 1.75%, and 1.8%, respectively. compared with before september 15, 2022, the interest rates of various deposit products have been reduced by 15bp to 100bp in total, among which the 3-year fixed deposit interest rate has dropped from 2.75% to 1.75%, a decrease of 100bp.

the pressure on bank net interest margin is obviously an important concern for lowering the interest rates of existing mortgage loans. zou lan, director of the monetary policy department of the people's bank of china, admitted at a press conference on september 5 that in terms of interest rates, the central bank continues to promote a steady decline in the overall financing cost of society. at the same time, it should be noted that due to the diversion of bank deposits to asset management products and the narrowing of bank net interest margins, there are still certain constraints on the further decline of deposit and loan interest rates.

on august 4, 2024, in huizhou, guangdong, citizens consulted about buying houses at a sales office. photo/visual china

however, banks also face a dilemma between interest losses caused by early loan repayment and reduced net interest margin.

economist ren zeping believes that from the perspective of banks, banks currently urgently need to solve the problem of expanding 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.

the reduction in the interest rate of existing mortgage loans last year did curb the tide of early repayments to a certain extent. according to data from the central bank, before the reduction in the interest rate of existing mortgage loans, the amount of early repayments of mortgage loans nationwide increased. in august 2023, the amount of early repayments of personal housing loans nationwide reached 432.45 billion yuan. after the release of the "notice" on august 31, the average monthly early repayment amount of mortgage loans from september to december fell by 10.5% compared with august.

however, it is still questionable whether the new round of reduction in the interest rate of existing mortgage loans can curb early repayment. with the net interest margin of banks already at a historical low, if banks make up for the loss of the reduction in the interest rate of existing mortgage loans by lowering deposit rates, residents may increase their willingness to repay their loans early due to the decline in investment returns. tianfeng securities research report stated that reducing the interest rate of existing mortgage loans may not completely alleviate the pressure of "early repayment" because the root cause of the latter is the decline in the social investment return rate.

the 2023 annual report of china merchants bank specifically mentioned: after the adjustment of the interest rate of existing mortgage loans, the interest rate spread between new and old loans narrowed, which had a certain mitigating effect on early repayments. however, due to the current downward trend in investment returns in the market, it is expected that early repayments of mortgages in 2024 will still be at a relatively high level in recent years.

ren zeping believes that lowering the interest rates of existing mortgage loans will lead to interest losses for banks, and banks, especially those with a high proportion of mortgage loans, lack motivation. it is recommended to support banks with a high proportion of mortgage loans to increase their enthusiasm. for example, window guidance should be given to state-owned banks and joint-stock banks with large mortgage loans, and state-owned banks should be encouraged to play a leading role. targeted reserve requirement ratio cuts can be given to banks that actively lower the interest rates of existing mortgage loans. real money and silver bottom-up subsidies, the establishment of structural monetary policy tools, and equal or partial subsidies for interest losses caused by lowering the interest rates of existing mortgage loans.

how much room is there for reduction?

looking beyond the banks' perspective, in recent years many economists have proposed in interviews with reporters to lower the interest rates on existing mortgage loans as a supplementary or alternative measure to directly distributing cash to residents, in order to expand residents' consumption.

consumption is in urgent need of a boost. according to the national bureau of statistics, in the first seven months of 2024, the total retail sales of consumer goods increased by 3.5% year-on-year, with the growth rate falling by 0.2 and 3.8 percentage points month-on-month and year-on-year respectively. the "china regional financial operation report (2024)" stated that the reduction in the interest rate of existing mortgage loans last year "played a significant role in boosting consumption growth." in the first quarter after the policy was implemented, that is, in the fourth quarter of 2023, the per capita consumption expenditure of urban residents nationwide reached 8,679 yuan, an increase of 8.4% year-on-year, and the growth rate increased by 12.3 percentage points over the same period last year.

a sampling survey conducted by the chongqing branch of the people's bank of china on home-buying families affected by the reduction in existing mortgage interest rates showed that more than 30% of the residents surveyed planned to use the saved interest expenses to increase consumption, including daily consumption, travel, and children's education.

the market naturally expects that a new round of reductions in existing mortgage interest rates can achieve the same effect, but with banks facing a dilemma, how much room for reduction is there?

in the "china regional financial operations report (2024)", the central bank reviewed the policy effects of the 2023 reduction in interest rates on existing mortgage loans in a special topic, saying that since the implementation of the policy, the interest rates on more than 23 trillion yuan of existing mortgage loans have been reduced, with an average decrease of 0.73 percentage points, reducing borrowers' interest expenses by about 170 billion yuan each year.

the average reduction in the last round of existing mortgage rates was 73 basis points, but it only applies to first-time homebuyers, and the new implementation rate must not be lower than the first-time homebuyer rate floor in the city where the original loan was issued. based on these two restrictions, tianfeng securities research believes that the breadth and magnitude of the reduction in existing mortgage rates in august 2023 are not small, but there is still room for further reduction.

since the lower limit of mortgage interest rates has not been cancelled or significantly reduced when the original loans were issued, the reduction will be affected in cities where the lower limit of interest rates was higher when the original loans were issued. for example, the lower limit of the first mortgage interest rate in beijing has been maintained at lpr+55bp for a long time.

regarding the room for a new round of interest rate cuts on existing mortgage loans, lu ting believes that the central bank may guide commercial banks to lower interest rates on existing mortgage loans in the next few months, and the extent of the interest rate cut is expected to be similar to that at the end of 2023.

ren zeping believes that considering that the bank's net interest margin is already at a low level, the current round of reduction is expected to be in the range of 60bp-80bp. according to his calculations, based on a 30-year mortgage loan of rmb 1 million 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 about rmb 340-450, saving 7%-9% of the monthly payment and total repayment amount.

regarding the method of adjusting the interest rates of existing mortgage loans, the outside world is particularly concerned about whether the inter-bank "mortgage transfer" method will be adopted. the last round of interest rate cuts on existing mortgage loans nominally adopted the form of negotiation between existing first-home borrowers and lending financial institutions. in fact, less than a month after the release of the "notice", on september 25, 2023, all banks started batch automatic adjustments for customers who were judged to meet the adjustment rules for existing first-home mortgage loans. for those who need further judgment or processing, online and offline channels for accepting customer applications are opened, which is also the reason why many bank apps have launched related functions.

the rumored "inter-bank mortgage transfer" means that borrowers can apply for mortgage loans from other banks again, thereby intensifying competition among banks. a similar situation occurred after the 2008 financial crisis.

in october 2008, the central bank issued a policy to lower the lower limit of mortgage interest rates from 0.85 times the benchmark interest rate to 0.7 times. in the fourth quarter of that year, small and medium-sized banks actively provided customers with free "mortgage transfer" and other services to snatch customers from large banks, which led to joint-stock banks and large state-owned banks successively lowering their existing mortgage interest rates.

chen wenjing, director of market research at china index academy, told china news weekly that the expectation of encouraging "mortgage transfer" between different banks may be relatively weak. "it may be more appropriate for borrowers to exchange with the original commercial bank or for the original commercial bank to directly lower the interest rate of existing mortgage loans. transferring mortgages between different banks may cause greater market competition, which will disturb the stability of expectations."

the new round of interest rate cuts for existing mortgage loans has not yet landed. compared with people's expectations, the official statement is relatively cautious. at the press conference on september 5, zou lan said that policy adjustments such as lowering the reserve requirement ratio and interest rates still need to observe economic trends.