Recently, several major banks in China, including Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank, announced that starting October 25, they will implement a bulk adjustment of existing personal mortgage rates. Most banks are aligning their actions, adjusting mortgage rates to the Loan Prime Rate (LPR) minus 30 basis points for eligible loans, except for second mortgage loans in cities like Beijing, Shanghai, and Shenzhen. Additionally, specific banks will have their own guidelines for these adjustments. Experts suggest that this move addresses the new dynamics in the real estate market and will alleviate the monthly financial burden for homebuyers.
Defining the Adjustment Scope
Li Peijia, head of the China Financial Team at the Bank of China Research Institute, noted that this adjustment of existing mortgage rates is beneficial in reducing household debt burdens and stimulating consumer spending. The process is characterized by its timeliness, automation, and uniformity. Since the People’s Bank of China announced the policy on September 24, commercial banks have taken swift action, with several banks, including ICBC and Bank of China, already issuing notifications regarding the adjustments. Automation is another feature, as individuals do not need to apply for these changes; banks will implement these adjustments automatically. Importantly, banks are generally adjusting the rates consistently to LPR minus 30 basis points, unlike the previous round of adjustments, which involved negotiations between individual borrowers and banks, leading to significant variations.
Industry insiders have analyzed that while contracts typically fix the additional margin on mortgages based on LPR for their duration, the long-term nature of these contracts means that fixed margins may not accurately reflect changes in borrower credit or market supply and demand. As the marketization of interest rates deepens, there is a need to optimize regulatory practices to facilitate appropriate adjustments to contracts between banks and borrowers. Commercial banks are coordinating self-regulatory agreements to implement bulk adjustments for eligible existing mortgages.
In light of recent changes in the supply-demand relationship in China’s real estate market, the People’s Bank of China, in collaboration with relevant departments, has rolled out policies to push forward interest rate marketization and protect the legal rights of both lenders and borrowers. They recently announced improvements to the pricing mechanism for commercial personal housing loans, with a push for banks to swiftly devise implementation plans.
It is important to note that not all existing mortgage loans will qualify for these rate reductions, as indicated by each bank’s specified criteria. For instance, the Postal Savings Bank’s announcement clarifies that the rate adjustments will only apply to commercial personal housing loans that have been disbursed, excluding commercial property loans and certain other types of financing.
The ICBC’s announcement outlines conditions under which existing personal housing loans would receive adjustments, specifying that these would include loans designated for residential purposes with interest rates exceeding LPR minus 30 basis points and requiring floating rate pricing. Fixed-rate loans must first be converted to floating rates before adjustments.
Yuan Yuejin, deputy director of the Shanghai E-House Real Estate Research Institute, emphasized that this adjustment is a significant development in lowering the financial burden associated with existing housing loans, helping to ease the pressure on banks from early repayments while stimulating consumer spending.
Optimizing Bulk Adjustments
According to the initiative for bulk adjustments on existing mortgage rates, banks are expected to uniformly apply new rate structures to all qualifying loans by October 31, 2024. While banks will collectively adjust the rates, they have laid out specific requirements. For floating-rate mortgages based on LPR, banks like ICBC and Postal Savings Bank have stated they will proactively adjust the additional points without requiring customer applications. Conversely, for fixed-rate loans, customers will need to request a conversion to floating-rate pricing before banks can apply the new adjustment rules.
Multiple banks have indicated that from October 12, 2024, customers can use online and mobile banking platforms to initiate the conversion process, or reach out to their loan officers for assistance. Additionally, adjustments for properties transitioning from second to first mortgage status have been clarified, with ICBC stating that such loans may automatically receive lower rate adjustments without a separate application, provided they don’t fall under specific major city regulations.
Importantly, banks confirmed that no fees will be charged to customers during this rate adjustment process. Researcher Lou Feipeng from Postal Savings Bank articulated that the bulk adjustment method enhances operational efficiency for banks and residents alike, helping ensure that beneficial policy adjustments are effectively enacted.
Monthly Payments Significantly Reduced
So, how much will users save after this round of adjustments on their mortgage rates? According to various banks, if a loan is based on the LPR as a floating rate and currently exceeds LPR minus 30 basis points, the new rate will be set at LPR minus 30 basis points. As of September 20, 2024, the one-year LPR was 3.35%, and loans longer than five years saw a rate of 3.85%. If a customer’s existing LPR stands at this 3.85% benchmark, their mortgage rate may be reduced to 3.55%.
Yuan Yuejin explained that this reduction marks a nationwide effort to lower existing mortgage rates, which could positively impact customers starting in November. For example, with a 30-year housing loan pegged to a five-year LPR at 3.85% and an initial mortgage rate of LPR plus 20 basis points (4.05%), the adjusted rate would be 3.55%, dropping by 50 basis points. For a loan amount of 1 million yuan, this change means a monthly payment reduction from approximately 4,803 yuan to 4,518 yuan, resulting in a savings of about 285 yuan per month.
It is important to note that while this bulk adjustment has been initiated, some discrepancies in loan rates might still occur in the short term. This is due to the adjustment focusing solely on the LPR margin rather than re-evaluating the loan pricing date, which can vary among borrowers. At the loan adjustment date, rates will eventually align across the board.
According to a report released by the People’s Bank of China, the outstanding balance of personal housing loans was 37.79 trillion yuan by the end of the second quarter of 2024, representing a year-on-year decrease of 2.1%. The four major state-owned banks collectively held approximately 22.3 trillion yuan in personal housing loans, accounting for about 59% of the total. Chief researcher Dong Ximiao from Zhuhai Hengqin claims that the completion of this bulk adjustment could lead to an annual reduction of roughly 150 billion yuan in bank interest income. However, with the narrowing of interest rate spreads between new and existing loans, early repayments may decrease, stabilizing banks’ housing loan volumes.
