The People’s Bank of China (PBOC), the country’s central bank, has announced a significant reduction in mortgage rates for existing home loans, lowering them by approximately 0.5 percentage points. This move aims to align existing loan rates with those of newly issued loans and to invigorate the housing market in the Chinese mainland.
At a recent press conference on financial support for high-quality economic development, PBOC Governor Pan Gongsheng also revealed that the minimum down payment ratio for both first and second homes will be unified at 15 percent. Financial institutions now have the autonomy to determine mortgage rates for their clients, following the cancellation of nationwide minimum mortgage rates earlier this year.
The reduction comes in the backdrop of a widening interest rate gap between existing and new home loans. By the end of June, the weighted average mortgage rate for newly issued personal home loans nationwide was 3.45 percent, down 0.66 percentage points year-on-year. In contrast, some existing loans carried rates more than 100 basis points higher, prompting many homeowners to repay their loans ahead of schedule or refinance through alternative means.
This prepayment trend has posed challenges for commercial banks, disrupting operations and credit businesses. By adjusting mortgage rates for existing loans, the PBOC aims to ease repayment pressures on homeowners, improve household balance sheets, and enhance consumption capacity, all while stabilizing the banking sector.
Previous measures have shown positive outcomes. In August 2023, after policy adjustments, mortgage rates for over 23 trillion yuan ($3.28 trillion) worth of existing home loans were lowered, benefiting over 50 million households. The adjusted weighted average rate dropped to 4.27 percent, saving approximately 170 billion yuan in annual interest expenses. This policy also contributed to a significant increase in consumer spending in the fourth quarter of 2023.
However, banks face challenges due to narrower net interest margins. As of the second quarter, the net interest margin of China’s commercial banks was 1.54 percent, close to historical lows. Banks are encouraged to optimize their business structures to mitigate the impact of reduced mortgage rates and maintain profitability.
To support banks, Pan Gongsheng announced an upcoming reduction in the reserve requirement ratio (RRR) by 0.5 percentage points, injecting approximately 1 trillion yuan of long-term liquidity into the financial market. Additionally, the central bank’s policy rate will be lowered, guiding market rates for loans and deposits downward and helping to stabilize net interest margins.
These measures reflect a concerted effort by China’s financial authorities to balance the need for economic stimulus with financial stability, aiming to foster a healthy and sustainable housing market while supporting the broader economy.
Reference(s):
Analyst: Mortgage rates cut to support housing market in China
cgtn.com
