Economy Aug 14

China’s top banks fire mortgage salvo

Big lenders told to negotiate with home buyers so they drop floating interest rates and swap to mortgages linked to Loan Prime Rate; leaders want to cool property market and limit the risk of a collapse in home prices

China’s top banks fire mortgage salvo
China's property sector was growing at double-digit rates prior to the pandemic and is still growing now, but the central bank wants to limit the risk of the real estate market collapsing, which could generate widespread unrest. File photo: AFP.

(ATF) China’s top five banks have all announced a change on how they manage home loans from August 25. The move appears to have been undertaken to cool down the property market because of fears the real estate 'bubble' might burst.

For Chinese home buyers who haven't figured out whether to convert the price of their mortgage contract to a floating interest rate and other such matters the problem has been taken out of their hands.

On Wednesday (Aug 12) the Economic Daily published similar statements from the "Big Five" – the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the Construction Bank and the Postal Savings Bank of China – who all announced that housing loans will be uniformly linked to the floating rate of the pricing benchmarks to the Loan Prime Rate, in batches.

If a homebuyer is still confused, the announcement said that, starting from August 25, for individual home loans within the scope of batch conversion, the LPR pricing method would be uniformly adjusted in accordance with conversion rules. If a customer does not accept the batch conversion, they can automatically convert before a certain date. And if a customer has objections to the conversion result, after the batch conversion is done, they can transfer their loan or negotiate on what to do with it before the end of the year.

That is to say, existing floating-rate personal home loans (including personal commercial housing loans) issued or signed before January 1, 2020, plus others not issued as of August 24 and not yet processed, the five major banks will uniformly convert all loans in batches – to pricing benchmarks, from August 25, and people don't need to do anything "if you are a house buyer".

According to a previous announcement by the People’s Bank of China (the central bank), financial institutions were told to negotiate, from March 1 this year, with customers on floating interest rate loans set on pricing benchmark conversion terms – to convert the interest rate by the pricing method agreed in the original contract – to using the Loan Prime Rate (LPR) as the pricing benchmark, plus or minus points (a bonus point can be a negative value), and the value of the bonus point is fixed during the remaining period of the contract. The contract could also be converted to a fixed interest rate. But the pricing basis can only be converted once. 

Existing loans on a floating rate that in the last repricing cycle may not be converted. In principle, the conversion of the floating-rate loan pricing benchmarks should be done before August 31, 2020.

The five major state-owned banks have basically the same rules for this batch conversion.

After the existing commercial personal housing mortgage loan pricing benchmark is switched to the LPR, there will be no change in personal interest expenses for at least the next year. But it should be noted that the newly issued housing loan interest rate can be adjusted once a year based on the latest LPR quote.

'Homes for living, not speculation'

It is not entirely clear why this move was announced, but the Chinese leaders have been using phrases such as "Houses are for living in, not speculation." This suggests they want the property sector – and rising house prices – to cool down.

The real estate market in mainland China saw double-digit growth before the Covid-19 pandemic, and it is still growing now, although more slowly.

China has yet to see a nationwide property price collapse, but it may prove too much of a shock if prices fall all around the country. This explains why banks are taking a softly softly approach and linking mortgages to the Loan Prime Rate.

If house prices in the cities see large falls and negative equity, citizens may tear up their "social contract" with the government.

Officials clearly want to limit any prospect of unrest over this issue.

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