China’s commercial banks are expressing concerns about the effectiveness of the central bank’s recent rate cut on outstanding mortgage rates. The People’s Bank of China (PBOC) issued new guidelines last month, instructing commercial banks to lower interest rates on outstanding mortgages for first-home loans, in an effort to stimulate consumption and discourage premature mortgage repayments that were impacting bank profits.
According to a spokesperson for the PBOC, the reduction in mortgage rates will help ease the financial burden on households and improve consumer confidence. Some homeowners have already reconsidered their mortgage prepayments in light of the new policy. For example, Kang Chao, an insurance company employee in Changsha, said that a new mortgage rate of 4.2 percent could free up approximately 1,700 yuan (US$234) per month for his family’s living expenses.
Before the rate cut, some homeowners felt pressured to pay off their mortgages quickly, especially after having children. The new policy has provided some relief for these individuals and has led to a decline in mortgage prepayments. However, analysts estimate that around US$700 billion in mortgages, equivalent to 12 percent of the country’s total mortgage balance, has been prepaid since 2022.
The wave of early mortgage repayments poses a potential threat to Chinese commercial banks, with analysts suggesting that their earnings could decline by up to 5 percent this year if the trend continues. Furthermore, if banks refinance home loans at lower rates, their net profits may also drop by 1 to 5 percent, according to a report by Fitch Ratings.
Gary Ng, a senior economist for Asia-Pacific thematic research at Natixis, explained that early repayment behavior is driven by interest rates, and as the gap between new and outstanding mortgage rates narrows, the incentive to pay down mortgages early decreases. However, he emphasized that lowering outstanding mortgage rates alone is not enough to boost household confidence in properties as the confidence issue is more complex.
A banking analyst at a commercial bank in Beijing also expressed skepticism about a substantial decrease in prepayments in the short term. Many homebuyers still want to reduce their financial liabilities in a declining economy, even though the benchmark interest rate is higher than the returns of most wealth-management products.
The analyst noted the changing landscape of investment options, stating that in the past, investing in the stock market or wealth-management products could yield returns of up to 30 percent, making it more attractive than paying off mortgages with cash. However, with the current crisis in China’s property market, high-risk, high-return investment options tied to real estate investment trusts are no longer available.
In conclusion, while the cut to outstanding mortgage rates is expected to alleviate the burden on households and discourage premature repayments, it may not be enough to significantly boost China’s household confidence in properties. The measure could potentially impact bank profits, and the outlook for prepayments remains uncertain as homeowners navigate the evolving economic landscape and investment opportunities.