When will the interest rate on existing mortgages be reduced? How can existing mortgages be transferred between banks? In response to the new round of housing finance policies that have recently sparked market and homebuyer discussions, reporters from Daily Economic News visited various banking institutions in different locations, discussing in depth with industry insiders how mortgage transfers will impact banks and homebuyers.
“Do you need an official answer?” The head of a major bank’s personal loan center joked to the reporter, saying that there have been too many customers coming to inquire recently. Existing mortgages are related to every family’s finances and are closely linked to the business development of banks. Banks in various places respond to the “reduction of interest rates on existing mortgages”: waiting for specific rules to be released. On September 24th, at a press conference held by the State Council Information Office, the central bank governor Pan Gongsheng stated that the interest rate on existing mortgages would be reduced and the minimum down payment ratio for mortgages would be unified, guiding commercial banks to bring the interest rates on existing mortgages closer to those of newly issued mortgages. Pan Gongsheng introduced at the press conference that the central bank plans to guide banks to make batch adjustments to the interest rates on existing mortgages, with an expected average reduction of about 0. 5 percentage points. It is expected that this policy will benefit 50 million households and 150 million people, reducing the total annual interest expenditure of households by about 150 billion yuan. Looking back a year ago, the last adjustment of the interest rate on existing mortgages significantly reduced the interest rate gap between existing mortgages and newly issued mortgages. On August 31, 2023, the central bank and the General Administration of Financial Regulation issued the Notice on Matters Related to Reducing the Interest Rate on Existing First Home Loans, deciding to reduce the interest rate on eligible existing first home loans starting from September 25 of the same year. Borrowers can reduce the pressure of existing mortgages by applying for new loans to replace existing ones or by changing the interest rates on existing ones. Subsequently, several banks issued announcements, starting from September 25, 2023, to batch reduce the interest rates on existing first home loans and clarify the operational rules. In early September, the four major state-owned commercial banks, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank, issued announcements clarifying matters related to the adjustment of interest rates on existing first home loans, explaining the scope of adjustment, the level of interest rates after adjustment, and the method of adjustment. Since then, several joint-stock banks and local urban and rural commercial banks have followed suit, disclosing details of interest rate adjustments on existing mortgages. The reporter noticed that the 2023 Fourth Quarter China Monetary Policy Implementation Report released by the central bank previously showed that the weighted average interest rate on newly issued individual housing loans was 3. 97%, 0.29 percentage points lower than the same period last year. The average interest rate on more than 23 trillion yuan of existing first home loans was reduced by 0.73 percentage points, saving borrowers about 170 billion yuan in interest expenditure per year. On May 17, 2024, new policies for mortgage loans were introduced again.In response to the significant changes in the supply and demand relationship of China’s real estate market, the central bank has abolished the minimum personal housing loan interest rate at the national level. The vast majority of cities have also abolished the local minimum interest rates for first and second home mortgages, allowing financial institutions to independently determine the personal housing loan interest rates for their customers.
Consequently, the gap between new and existing mortgage interest rates has widened again, and homebuyers are particularly concerned about the new round of reductions in the interest rates of existing mortgages. Currently, the average interest rate of our existing mortgages is about 4%, or even higher. Based on this calculation, if the commercial loan amount is 1 million yuan and the repayment period is 30 years, a reduction of 50 basis points in the interest rate will result in a monthly payment decrease of about 280 yuan, saving over 100,000 yuan in interest expenditure over 30 years. It is worth noting that last year’s reduction in existing mortgage interest rates did not include second homes; however, this round of adjustment includes both first and second homes, indicating the strength of the policy. “Due to the large number of borrowers involved, banks also need a certain amount of time for the necessary technical preparations,” said Pan Gongsheng at the release. Next, the central bank is also considering guiding commercial banks to improve the pricing mechanism of mortgage loans, allowing banks and customers to dynamically adjust based on market-oriented principles through independent negotiations. As a homebuyer, the reporter inquired about the reduction of existing mortgage interest rates at the personal loan departments of several banks in Beijing and Shanghai, and the staff all stated that they still need to wait for the specific details to be released. “The specific implementation time and operation method will be discussed and implemented after the regulatory authorities issue the detailed rules. We will issue a unified notice after the details are out,” said a staff member of the Industrial and Commercial Bank of China. The industry’s net interest margin is still at a historical low, and banks face difficulties in transferring mortgage business. The reporter noticed that in the current market discussion on the reduction of existing mortgage interest rates, in addition to the “repricing” similar to last year, there is also the “mortgage transfer business”. According to the Financial Times, regarding the issue of inter-bank transfer of existing mortgages, the central bank stated on September 24 that it would initially implement the transfer within the bank and then consider whether there is an opportunity to allow inter-bank mortgage transfers. “Repricing” refers to the existing mortgage borrowers negotiating with the original lending bank to set a new interest rate for the mortgage, transferring the mortgage from Bank A to Bank B with more favorable interest rates, and signing a mortgage contract based on the latest loan terms. In the “mortgage transfer” business, borrowers can change their lending banks. For example, if the existing mortgage interest rate at Bank C is 4.3%, but the newly issued mortgage interest rate is 3.3%, you can negotiate with Bank C to sign a new contract and synchronize the interest rate to 3.4%. So, how do commercial banks implement the “mortgage transfer” business, and what are their difficulties? “Do you want an official answer?” The person in charge of the personal loan center of a major bank in the western region joked to the reporter, saying that there have been many inquiries recently, but there are no operational details released yet.We can only state that our bank has taken note of the relevant news and is actively studying the relevant plans and specific operational guidelines. Once we receive the formal documents from the regulatory authorities, we will promptly and orderly implement them in accordance with the law. Subsequently, our bank will announce detailed operational instructions through official websites, branches, and customer service public accounts, which you are welcome to consult at any time.
Looking back, during the large-scale adjustment of existing housing loan interest rates in 2008, the practice of ‘cross-bank mortgage transfers’ was also liberalized. At that time, the central bank reduced the lower limit of the housing loan interest rate from 0.85 to 0.7 times, and many small banks initiated cross-bank mortgage transfers to retain customers, offering substantial discounts on interest. However, at that time, the net interest margin of banks was relatively high, mostly above 3%, with substantial profits. Even after the ‘discount war’ on existing housing loan transfers, the net interest margin was still above 2%. The situation today is different from the past. On August 9th, the Financial Regulatory Authority released data on the main regulatory indicators of the banking and insurance industries for the second quarter of 2024, showing that the net interest margin of commercial banks in China is 1. 54%, consistent with the first quarter of 2024. Compared with the same period last year, it has decreased by 20 basis points, reaching a historical low. According to journalist statistics, the net interest margin of listed banks on the A-share market continued to narrow in the first half of the year. Based on the data from Oriental Fortune Choice, as of the end of June 2024, the average net interest margin of 42 listed banks on the A-share market was 1. 64%, a decrease of 0.14 percentage points from the end of the previous year, and a decrease of 0.22 percentage points compared to the same period last year. Among them, 16 listed banks had a net interest margin below the industry average of 1.54%, 4 banks were at the industry average, and a total of 30 were below the 1.8% ‘warning line’ set in the ‘Prudent Assessment Implementation Measures (Revised Edition of 2023)’. Industry insiders: The mortgage transfer business needs to find a balance between risk control and market activity. What are the risks and difficulties in the actual operation of the mortgage transfer business? The Chief Economist of Industrial Bank, Lu Zhongqing, pointed out that, considering the issues that need to be addressed in the ‘mortgage transfer’ business, in cross-bank ‘mortgage transfer’ business, it is necessary to consider the reassessment of the value of collateral, the change of mortgage ownership, and the different loan standards among different banks. In addition, from the perspective of operational convenience, Yan Yuejin, the Deputy Director of the Shanghai Yiju Real Estate Research Institute, believes that ‘mortgage transfer’ may increase a lot of additional workload. In fact, in the previous adjustments of existing housing loan interest rates, banks generally adopted a simpler method, which is to automatically adjust through the system, directly reducing the monthly payment amount in the subsequent months without the need for customers to perform additional operations. ‘Compared to repricing, the mortgage transfer business is a relatively complex financial business involving multiple stakeholders, and it is necessary to find a balance between risk control and market activity.’A senior banking researcher told reporters. He believes that for banks, the primary impact they face is the compression of the interest rate spread, especially for those banks with pressure on net interest margins and profitability. In addition, banks may need to lower interest rates to attract and retain customers, which will increase market competition pressure. From an operational perspective, mortgage transfer involves multiple links, increasing banks’ operating costs and operational difficulties. The researcher said, “In the short term, the mortgage transfer business may compress the interest rate spread space of banks and affect their short-term earnings. However, in the long run, mortgage transfer may also reduce the non-performing loan ratio to a certain extent, improve asset quality, and enhance the market competitiveness of banks.” Why is the mortgage transfer business first operated within the bank and cross-bank operations are not supported for the time being? The researcher believes that implementing mortgage transfer within the bank in the initial stage can avoid the complexity brought by cross-bank operations, reduce coordination costs and risks. At the same time, it can also prevent an imbalance in competition among banks and affect market stability. “Cross-bank mortgage transfer involves more legal and operational difficulties, such as issues like mortgage right changes and information sharing, and requires further policy and technical preparations.” Regarding this, Wang Qing, the chief macro analyst at Dongfang Jincheng, said that implementing “mortgage transfer” for existing mortgages within the bank, that is, the repricing of the interest rate of existing mortgages, follows the same path as the rate cut in September last year. The emphasis on “implementing mortgage transfer within the bank in the initial stage” is mainly because current existing mortgages still belong to high-yield and low-risk high-quality assets of banks. Allowing cross-bank mortgage transfer will intensify competition among banks, especially having a greater impact on large banks with a relatively high proportion of existing mortgage scale. “For homebuyers, when actually handling the mortgage transfer business, the property needs to be re-evaluated. If the property valuation decreases, it may lead to a reduction in the loanable amount.” The researcher reminded that if housing prices decline, it may affect the loan amount in the mortgage transfer operation and bring additional financial burdens to homeowners. In addition, attention should also be paid to the possible fees and time costs during the business process, as well as the uncertainty brought to the result of the new loan application due to changes in personal credit status. How is the mortgage transfer business operated overseas? The Minsheng macro team analyzed that taking the United States as an example, during the 2008 financial crisis, the country launched the Home Affordable Refinance Program (HARP) to help homeowners in distress reduce their repayment pressure by lowering interest rates or extending loan terms. In addition, Japan’s mortgage transfer business mainly relies on innovation in contract terms to optimize loan conditions. For example, the “Flat 35” product provided by the Japan Housing Finance Agency (JHF) allows borrowers to choose a long-term fixed-rate mortgage to cope with the risks brought by interest rate fluctuations.
Residents can apply for a 0.25% discount in the first ten years of repayment and an additional 0.25% discount in the first five years. Meanwhile, the interest rate is reviewed monthly, and there is a probability of changing the fixed interest rate in the contract.
From the perspective of the implementing entity, the mortgage refinancing policy in the US is government-led. A special purpose entity is established to acquire the existing mortgage loans of banks, which not only ensures the health of commercial banks’ balance sheets but also guarantees the scope and effectiveness of the implementation of the mortgage policy. In Japan, innovative contract terms, such as the long-term fixed-rate loans provided by “Flat 35”, are used to attract borrowers to conduct mortgage refinancing, thereby reducing interest rate risks.
