Chinese mortgage borrowers are expected to make repayments in advance and seek more preferable financing conditions on offer after regulators ordered reductions to the interest rates for first home loans.
Since the end of the Spring Festival vacation, banks in major cities around China have reduced rates for first home loans at the behest of both the central bank and local authorities, in some cases reducing them to below the 4% threshold.
Some domestic observers expect the adjustments to prompt a wave of advance repayments of mortgages by borrowers seeking to benefit from the rate cuts.
“On the one hand, due to the high interest rate of earlier loans, home buyers now hope to cut costs by repaying the loan in advance,” said Yan Yuejin (严跃进), research director of Shanghai E-House Real Estate Research Institute to state-owned media.
“On the other hand, in 2022, the income from investment and asset management products fluctuated significantly and fell far shore of expectations. There is an inverse relationship between the yields of mortgages and investment and wealth management products, which has made some home buyers eager to repay their home loans in advance.”
“As long as the mortgage interest rate is higher than the rate for wealth management products, and borrowers expect housing prices to fall, the motivation to make repayments of loans in advance will always exist,” said Li Yujia (李宇嘉), chief researcher at the Housing Policy Research Center of the Guangdong Urban Planning Institute
Wang Pengbo (王蓬博), financial sector analyst with Botong Analysis (博通分析), said that a wave of advance repayments could have an adverse impact on Chinese banks, which could prompt many to thwart such efforts by borrowers.
“Personal mortgage loans are the core high-quality assets for banks,” Wang said. “A large number of early repayment of mortgage loans will directly affect their revenue and profits. For this reason, many banks could choose to increase the repayment threshold.
“However, banks should also understand the financial needs of consumers and take the initiative to improve services, instead of setting obstacles to early repayment. After all, compared with short-term profits, long-term credit is more valuable.
“If home buyers repay loans in advance and encounter regulatory breaches and malicious obstacles they can make appeals with the China Banking and Insurance Regulatory Commission to protect their legitimate rights and interests.”
Dong Ximiao (董希淼), a financial researcher from Fudan University, called for authorities to adopt measures to reduce the home loan burden on consumers in order to prevent a wave of advance repayments and illegal “loan transfers.” This could include accelerating guided reductions to the 5-year loan prime rate, and reducing rates for outstanding mortgages.
“Taking into account the stabilization and recovery of the macro-economy and the recovery of the real estate market in 2023, the prepayment boom could see a flattening in future,” Dong said.
“Of course, stabilizing the confidence and expectations of households and slowing down loan repayments has more important and far-reaching significance.”