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there is at least an 80 basis point difference between the existing mortgage rate and the latest mortgage rate. any existing mortgage holder with a normal mind cannot ignore such an interest rate difference.

written by zhang mingyang

in the past two days, there have been reports that china will lower the interest rates on existing mortgage loans as early as september, with the reduction set to reach 50 basis points, and commercial banks are currently "making final preparations."

this is certainly good news for those borrowers who are carrying high mortgage loans.

but they should also be sensitive to the fact that since the end of august, there has been constant news about lowering the interest rates on existing mortgage loans. two weeks have passed, and it is still at the "rumor" stage. even the seemingly conclusive news above was extremely cautious in using open-ended wording such as "as early as september", which allows for retreat or advancement.

the market has been waiting anxiously for this final push.

01

why does it seem that the reduction of interest rates on existing mortgage loans is coming so late? the most reasonable explanation is that the relevant stakeholders are still in the final game of bargaining.

the opposing side is naturally the banks that will lose huge interest income.

on september 2, wang liang, president of china merchants bank, proactively responded to the issue of existing housing loans at an exchange meeting: at present, china merchants bank has only seen the news in the media and has not yet received opinions from the macro-mortgage management department, the people's bank of china or the state administration of financial supervision and administration, nor has it sought opinions from commercial banks and other parties.

the meaning of this passage is very clear. if you want to lower the deposit and mortgage interest rates, it is the minimum to discuss it with commercial banks. even if it is implemented, it will not be so fast.

even more informative is the following statement by governor wang liang:

once such policies are introduced, it will have a negative impact on the existing mortgage rates of the banking industry. i believe that the macro-management departments will do a good job of demonstration and research before introducing similar policies.

from their words, the resistance to lowering the interest rates on existing mortgage loans could not be more obvious.

picture/tuchong creative

from the bank's perspective, there is nothing wrong with what president wang said.

in the first half of this year, the revenues and profits of the six major banks (industrial and commercial bank of china, agricultural bank of china, china construction bank, bank of china, bank of communications and postal savings bank of china) almost all declined, and the core reason was the decline in net interest margin.

if the interest rates on existing mortgage loans are further reduced at this time, banks will find life even more difficult.

the continuous and substantial adjustments in commercial bank share prices since the end of august just reflect this gloomy expectation.

but the problem is that lowering the interest rates on existing mortgage loans is far from being the sole responsibility of banks. even if no one cares about the interests of mortgage lenders, this is also related to the stability of the real estate market and the overall economic situation.

in this matter, we need to listen to the bank's opinion, but if we only consider the issue from the bank's perspective, it would be absurd.

on september 7, china real estate news, a media outlet under the ministry of housing and urban-rural development, published an editorial titled "interest rate policy can still be used to support domestic demand in the property market," saying that "extraordinary times call for extraordinary measures" regarding the reduction in interest rates on existing mortgage loans.

china real estate news directly addressed the financial regulatory authorities and banks, "recently, we have also noticed that bank personnel have opinions on lowering the interest rates on existing mortgage loans... the financial sector should do a better job of seeking advice from the public, actively listen to the beneficial voices of the market, and make appropriate scientific adjustments to the marginal existing loan interest rates."

in order to enhance the legitimacy of its own views, this editorial even brought up the overall situation of reform."reform requires courage and perseverance," he urged banks to make decisions early.

with the financial sector on one side and the real estate regulatory department on the other, the two sides communicated with each other from a distance, put all the problems on paper, and made the dispute public. this is undoubtedly an extremely rare healthy game.

02

according to the centaline property research institute, the average interest rate for first-home mortgages nationwide has fallen to around 3.25% in august 2024, and the average interest rate for second-home mortgages is around 3.6%. in some cities, the interest rate for first-home mortgages can even be kept below 3%.

the interest rates for existing mortgage loans across the country are generally still around 4%, and some even remain at a high level of over 4.5%.

this also means that there is at least 80 basis points difference between the existing mortgage interest rate and the latest mortgage interest rate.

any existing mortgage holder with a normal mind cannot ignore such an interest rate difference.

therefore, there has been a massive "early loan repayment wave" in recent years. this is also a market behavior.

however, simply asking existing mortgage holders to repay their loans in advance is obviously not enough to drive banks to proactively seek change.

currently, banks are facing multiple pressures of “having to lower rates”.

first, as mentioned above, there is pressure from the real estate sector. if the property market is to be stabilized, it is imperative to reduce the stock of mortgage loans.

second, the sluggish consumption data is attracting the attention of higher-level economic authorities. especially in first-tier cities, the pressure of mortgage loans is causing a significant crowding-out effect on the consumption of ordinary residents.

data released by the national bureau of statistics showed that in june 2024, the year-on-year growth rate of retail sales in beijing, shanghai, guangzhou and shenzhen dropped sharply by 12.8%, 11%, 10.2% and 3.2% respectively compared with may, to -6.3%, -9.4%, -9.3% and -2.2% respectively.

in the chinese context, policy pressure is often stronger than market pressure. the complaints of loan holders are far less decisive than the overall economic situation.

picture/tuchong creative

faced with heavy pressure, banks certainly have ways to defend themselves.

the classic argument of banks is that the interest rate spread in the banking system is already not high, and further compression will not only harm the normal operation of banks but also easily cause systemic risks.

this statement might have been useful a few years ago, but it is not convincing enough now.

as the above editorial of china real estate news said, "it is necessary to prioritize according to the economic environment and adjust and optimize the financial, monetary, fiscal and taxation policies related to real estate consumption."

compared with the operating pressure of banks, the current real estate and macro-economy are the most "heavy" and "urgent" ones.

compared with other sectors of the chinese economy, the overall situation of banks, at least on the surface, is much better. while many places are "selling off their houses", banks are still reluctant to give up the "lying win" status that has remained the same for decades.

the deep-seated risk of china's banking industry lies in the scale of potential non-performing assets.

however, lowering the interest rates on existing mortgage loans is actually beneficial to improving the non-performing asset situation of banks. the logic is also very simple. when the interest rate is lowered, the number of mortgage holders who are unable to perform or even default will also decrease.

in the past two years, when you open social media, you can often see stories of people being unable to pay their mortgages and being forced to default.

lowering interest rates means a little less interest income; but large-scale default will truly be a systemic risk.

the banks should be aware of this, but they are just unwilling to talk about it publicly, which is tantamount to exposing their cards in the game.

what's more, everyone, including banks, has a fluke mentality. although "large-scale mortgage defaults" are terrible, they have not happened after all; and the high interest rates on existing mortgages are instant cash flows that can be heard.

03

i believe that under various pressures, the bank will eventually compromise.

it is only a matter of time before the interest rates on existing mortgage loans are lowered.

however, the banks' bargaining and resistance are still meaningful.

for example, the current interest rate spread between new mortgage rates and existing mortgage rates is 80 basis points, but will the final reduction be to 80 basis points?

judging from the current information, at least in the first phase, it is unlikely that 80 basis points will be achieved in one go, and at most there will only be 50 basis points.

the temporary savings of 30 basis points are the result of bank bargaining.

picture/tuchong creative

for example, hasn’t the rate cut for existing mortgage loans been announced? if it is announced every day for a month, a week, or even a day, it means that the banks have “recovered” hundreds of millions of “losses”, and the banks are naturally happy to see this happen.i have considered the overall situation and agreed to reduce it, why don't you let me delay it for another ten days or half a month?

an additional bonus is that, precisely because of the news of lowering the interest rate on existing mortgage loans, many borrowers who were planning to repay their loans early stopped their actions and waited and watched. this helped the bank "recover" a large amount of "losses".

just wait.