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Chinese commercial banks fear stimulus will do little to stem the tide of mortgage defaults, putting pressure on margins

China’s commercial banks are questioning whether the central bank’s recent cut in outstanding mortgage rates will be enough to stem a flood of mortgage prepayments and help protect banks’ margins.

The People’s Bank of China (PBOC) last month announced new guidelines requiring commercial banks to reduce interest rates on outstanding mortgages for first-home loans. The new rates, which come into effect from September 25, were aimed at boosting consumption while reducing the incentive for households to pay off their mortgages early, which had led to a drop in bank profits.

“Reducing outstanding mortgage rates will help ease the interest burden on households,” a PBOC spokesperson told local media on Wednesday, adding that the new rules have already led to a decline in household prepayments and balances and will help improve consumer confidence. .

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In any case, the measure has caused some home buyers to reconsider their mortgage repayments.

Officers stand guard outside the headquarters of the People’s Bank of China, the central bank, in Beijing on September 30, 2022. Photo: Reuters alt=Officials stand guard outside 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, southeastern China’s Hunan province, told the Post that a new 4.2 percent mortgage rate could help his family free up about 1,700 yuan ($234) every month to cover living costs.

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“[My wife] and I both took out mortgage loans in 2018 and 2019, when interest rates were as high as 5.15 percent,” he said. “Every month we have to pay about 9,800 yuan, and this leaves us with no more than 3,000 yuan to spend on everything else.

“So we were under a lot of pressure to pay off our debts quickly, especially after we had a child. At one point we even considered selling one of our homes. Now that the new policy is in place, we feel somewhat relieved. “

The Chinese central bank has lowered mortgage interest rates on new loans since last year to stimulate home sales. But the policy 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 relatively expensive outstanding mortgages early.

An estimated $700 billion in mortgages, representing about 12 percent of the country’s total mortgage balance, have been prepaid since 2022, according to analysts.

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China’s commercial banks could see a drop in profits of as much as 5 percent this year if the wave of early repayments continues, according to analyst estimates. However, if banks refinance home loans at lower rates, their net profits could also decline by 1 to 5 percent, according to a report from Fitch Ratings.

Early repayment is a behavior driven by interest rates. As the gap between new and outstanding mortgage rates narrows, the incentive to pay off mortgages early will begin to decline, said Gary Ng, senior economist for Asia-Pacific thematic research at Natixis.

“That doesn’t mean anything though [lowering outstanding mortgage rates] is a panacea to boost Chinese households’ confidence in real estate,” he said. “The confidence issue is complex and it will take more than interest rate cuts to recover. While prepayments will decline, mortgage growth is not likely to make a significant jump.”

A banking analyst at the Beijing branch of a commercial bank echoed this view, telling the Post that a “substantial decline” in down payments is unlikely in the near term as many homebuyers are still looking to reduce their financial obligations in a shrinking economy.

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“The benchmark interest rate now stands at 4.5 percent, which is higher than the returns of most asset management products on the market,” said the source, who asked not to be named as she was not authorized to speak to the media. “People who have cash on hand will certainly want to pay off their mortgage sooner.”

Things have changed since “the old days,” she said, when investing in the stock market or wealth management products — instead of using cash to pay off mortgages — could yield returns as high as 30 percent.

“Many of these products were linked to real estate investment trusts, where the investor’s money would be used to finance projects by private developers,” she said. “But now that there is a crisis in the Chinese real estate market, these high-risk, high-return investment options are no longer available.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice covering China and Asia for more than a century. For more SCMP stories, explore the SCMP app or visit the SCMP Facebook page Tweet Pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.

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