Editor's note: Bruce Pang is chief economist and head of research for Greater China at JLL. The article reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity.

China's central bank will reduce mortgage rates for existing home loans, lowering them by approximately 0.5 percentage points to levels close to the rates of newly issued loans, said Pan Gongsheng, governor of the People's Bank of China (PBOC), the country's central bank, at a press conference on financial support for high-quality economic development on Tuesday. The minimum down payment ratio for both first and second homes will be unified at 15 percent.

Since May this year, when the PBOC announced the cancellation of nationwide minimum mortgage rates for personal home loans and other financial optimization policies for real estate, the lower limits on mortgage rates for existing first-home and second-home loans in most cities have been significantly reduced or even removed. Financial institutions can now independently determine mortgage rates for their clients' home loans. 

Data shows that by the end of June, the weighted average mortgage rate for newly issued personal home loans nationwide was 3.45 percent, down 0.66 percentage points year-on-year. Against this backdrop, coupled with the cumulative 35 basis points cut in the over-five-year Loan Prime Rate (LPR) in February and July, the interest rate gap between existing and newly issued home loans further widened, even exceeding 100 basis points in some cities.

The substantial interest rate gap between existing and newly issued housing loans provides strong motivation and incentives for citizens to repay their loans ahead of schedule. Influenced by factors such as the interest rate gap and personal balance sheet contraction, some mortgage holders have refinanced their home loans through early repayment, consumer loans, or business loans. This has led to high early repayment rates and reduced home loan balances in commercial banks, causing disruptions to banking operations and credit businesses.

Given the widening interest rate gap between existing and newly issued home loans, there is room to reduce mortgage rates for existing home loans. Adjusting mortgage rates for existing personal home loans in a lawful, steady, and orderly manner could better support the stable and healthy development of the real estate market, prevent homeowners from repaying loans ahead of schedule, and ensure the banks' operations and stability. This would help mitigate risks associated with interest rates, credit, deflation and legal violations, ease the repayment pressure and cut loan costs for homeowners, improve household balance sheets, and enhance residents’ consumption capacity and willingness. 

The best example is not far from recent memory. In August 2023, after the PBOC and the National Financial Regulatory Administration proposed reducing mortgage rates for existing first-home loans, borrowers were able to apply for new loans to replace existing ones or adjust the mortgage rates of existing loans to alleviate the pressure from existing home loans. Mortgage rates for over 23 trillion yuan ($3.28 trillion) worth of existing home loans were lowered, resulting in an adjusted weighted average rate of 4.27 percent, a reduction of 0.73 percentage points on average. This initiative has benefitted over 50 million households and 160 million people, saving approximately 170 billion yuan in annual interest expenses. In the four months following the policy implementation, the average monthly amount of early repayment of home loans dropped by 10.5 percent compared to before the policy, which directly elevated the year-on-year growth rate of the total retail sales of consumer goods in the fourth quarter of 2023 to the highest level over the past three years.  

As estimated, if mortgage rates for existing home loans were reduced by 75 to 100 basis points, for a 30-year mortgage loan worth 1 million yuan repaid using the average capital plus interest method, the borrower’s monthly payments could decrease by 400 to 600 yuan, allowing them to save about 5 percent to 7 percent on monthly and total repayments and potentially lowering their total interest expenses by 160 billion to 220 billion yuan. However, if banks fail to adjust their liability costs accordingly or do not lower deposit rates to effectively hedge, a 100-basis point reduction in mortgage rates for existing home loans could negatively impact banks' operating income and net profits by about 6 percent and over 10 percent, respectively, on an annualized basis.

According to key regulatory indicators released by the National Financial Regulatory Administration, the net interest margin of China's commercial banks was 1.54 percent at the end of the second quarter. Though this figure remains consistent with the first quarter of 2024 on a quarter-on-quarter basis, it is 20 basis points lower year-on-year from 1.74 percent in the second quarter of last year and close to historical lows. Commercial banks should actively respond to changes in the operating environment, optimize their business structure, and work hard to neutralize the impact of the reduction on mortgage rates for existing home loans and stabilize net interest margins. 

It is imperative to prudently and carefully compare and choose between repricing existing loans with original lending banks and refinancing mortgages with other banks during the steady and orderly reduction of mortgage rates for existing home loans. Transferring existing mortgage loans directly to other banks and signing new mortgage contracts may lead to disorderly market competition and further drive down mortgage rates and profit levels. Moreover, there is also debate on whether refinancing of mortgages should be extended beyond loans for first homes to cover those for second homes.  

By contrast, under the premises of market orientation and the rule of law, it is more robust and easier to manage to facilitate the reduction of mortgage rates for existing home loans through equal consultation and independent negotiation between borrowers and original lending banks, modifying the contractual terms to adjust mortgage rates or replacing existing loans with newly issued loans at lower mortgage rates. 

Pan Gongsheng further pointed out that the reserve requirement ratio (RRR) will soon be reduced by 0.5 percentage points to inject approximately 1 trillion yuan of long-term liquidity into the financial market. The central bank's policy rate will be simultaneously lowered, with the interest rate of seven-day reverse repurchases cut by 0.2 percentage points from the current 1.7 percent to 1.5 percent. This aims at guiding the market rates for loans and deposits to move downward in tandem and maintaining stability in the net interest margin of commercial banks. 

Measures like RRR cuts can continue to support banks in managing and controlling liability costs effectively. Furthermore, structural monetary policy instruments can also be employed to provide banks that adjust mortgage rates for existing home loans in a lawful and orderly manner with lower-cost, more stable funding sources, thereby boosting the financial sector’s ability to sustainably support the real economy.