The central bank of China is encouraging commercial banks to convert existing mortgage rates in order to reduce the pressure on residents’ interest payments and promote stable consumption. The State Council Information Office recently held a press conference on financial statistics for the first half of 2023, where Zou Lan, director of the Monetary Policy Department of the People’s Bank of China, discussed the impact of the change in wealth management yields and mortgage interest rates on residents’ loan repayment behavior.
Zou Lan stated that although the quoted interest rate in the loan market has dropped by 0.45 percentage points, the interest rate of stock mortgages issued in previous years is still relatively high. This has led to a significant increase in prepayment as residents use their deposits or reduce other investments to repay existing loans. In response, the central bank is encouraging commercial banks to independently negotiate with borrowers to change the contract agreement or replace existing loans with new ones.
The adjustment of stock mortgage interest rates has attracted market attention. However, experts believe that the reduction in interest rates on existing mortgages is not expected to be significant. Zhongtai Securities estimates that the scale of housing loans in China is nearly 40 trillion yuan, which is 13 times that of 2008. Therefore, the possibility of a comprehensive reduction in stock mortgages is low. Huaxin Securities suggests that the reduction in interest rates should be implemented gradually, starting with small and medium-sized banks and gradually spreading to larger state-owned banks.
The reduction in interest rates on existing mortgages is expected to have both positive and negative impacts. from a banking perspective, the reduction may put pressure on banks’ profits. The balance of personal housing loans in China in the first quarter of 2023 was 38.94 trillion yuan, more than ten times the figure at the end of 2008. On the other hand, the reduction of the deposit interest rate, especially the savings deposit interest rate, is expected to support banks’ net interest margin in the future.
The high interest rates on existing mortgages may marginally restrain the demand for house purchases and increase the willingness of residents to repay loans in advance. In contrast, the interest rates of newly issued mortgages have already decreased significantly. If the interest rates of existing mortgages are also reduced, it may reduce the pressure on residents’ interest payments and promote stable consumption. This could also reduce the incentive for early repayment of mortgage loans and ease the pressure on the household sector’s balance sheet. Additionally, the reduction in interest expenses may help maintain the stable asset quality of retail loans.
It is important to note that the Securities Times, the source of this news article, presents the information for reference only and does not constitute substantive investment advice. Readers are advised to operate at their own risk.