China’s Major Banks to Lower Interest Rates on Existing Mortgages

Introduction

Five of China’s major state banks have announced that they will start to lower interest rates on existing mortgages for first-home loans. This move is part of a series of support measures announced by Beijing in recent weeks to help homebuyers and address concerns over the health of the economy and the property sector.

Mortgage Rate Reduction

In separate statements, Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp, Agricultural Bank of China, Bank of China, and Bank of Communications have announced that they will reduce the interest rates of first-home loans to floor levels at the time of purchase. This change will come into effect on September 25.

Expected Savings for Homebuyers

Chinese brokerage China International Capital Corp Ltd (CICC) estimates that the average reduction for first homebuyers’ mortgage rates will be 50 basis points (bps), potentially saving them about 200 billion yuan ($27.31 billion) per year. CICC also estimates that loans to first-time buyers account for about 80%-90% of total outstanding mortgages.

Total Home Loans and Current Rates

China’s home loans totaled 38.6 trillion yuan ($5.3 trillion) at the end of June, representing 17% of banks’ total loan books. Currently, the national floor on first-home loans stands at 20 bps below the benchmark lending rate 5-year Loan Prime Rate (LPR), which is currently 4.2%. However, some big cities have higher floor rates.

Application Process for Rate Cuts

The banks have stated that the rate cuts will be effective from September 25. Clients who have fixed mortgage rates or whose mortgages were classified as second-home loans before the new mortgage easing policy in major cities will need to apply for the rate cuts.

Impact on Banks and the Economy

The mortgage rate cuts will put more pressure on banks’ margins at a time when the government is expecting them to do more to support the economy. To cushion the impact, banks have already cut interest rates on a range of yuan deposits. There are concerns that the property sector, which accounts for roughly a quarter of the economy, could see further turmoil after liquidity stress in leading developer Country Garden became public.

Reporting by Ziyi Tang and Ryan Woo

Editing by Edwina Gibbs, Simon Cameron-Moore, and Helen Popper

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