China's commercial banks are raising questions about whether the central bank's recent cut to outstanding mortgage rates will be sufficient to hold back a flood of mortgage prepayments and help protect bank margins.
The People's Bank of China (PBOC) unveiled new guidance last month requiring commercial banks to lower interest rates on outstanding mortgages for first-home loans. The new rates, which will be effective starting on September 25, aimed at stimulating consumption while also reducing the incentive for households to pay down their mortgages early, which had led to a decline in bank profits.
"Lowering outstanding mortgage rates will help alleviate the interest burden on households," a spokesperson for the PBOC told local media on Wednesday, adding that the new rules have already led to a decline in prepayments, and will help improve household balance sheets and consumer confidence.
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The measure has led at least some homebuyers to reconsider their mortgage prepayments.
Officers stand guard in front of the headquarters of the People's Bank of China, the central bank, in Beijing on September 30, 2022. Photo: Reuters alt=Officers stand guard in front of the headquarters of the People's Bank of China, the central bank, in Beijing on September 30, 2022. Photo: Reuters>
Kang Chao, an insurance company employee in Changsha, in southeast China's Hunan province, told the Post that a new mortgage rate of 4.2 per cent could help his family free up about 1,700 yuan (US$234) each month to cover living expenses.
"[My wife] and I both took out mortgage loans in 2018 and 2019, when the interest rates were as high as 5.15 per cent," he said. "Each month, we need to pay about 9,800 yuan, and this leaves us no more than 3,000 yuan to spend on everything else.
"So we were under a lot of pressure to pay off our debt quickly, especially after we had a child. At one point, we were even considering selling one of our houses. Now that the new policy is out, we feel somewhat relieved."
The Chinese central bank has been cutting mortgage rates on new loans since last year to boost home sales. But the policy move encouraged prepayments as homebuyers, saddled with expensive loans from previous years, began tapping into their personal savings and applying for other forms of cheap loans to pay off their comparatively expensive outstanding mortgages early.