China is planning to reduce interest rates on over USD 5 trillion in outstanding mortgages to lower borrowing costs and boost consumption. This move comes as China faces weak domestic spending and deflation risks. While new loans have record-low interest rates, most existing mortgages won't be repriced until next year, causing frustration among homeowners. Analysts warn that China might miss its 5% economic growth target, further shaking confidence in the economy. Lowering rates could pressure banks, whose margins have already fallen to record lows, but could save homeowners over 300 billion yuan in annual interest expenses.
China is preparing to lower interest rates on over USD 5 trillion worth of existing mortgages as soon as this month, sources familiar with the situation have revealed. This move is part of an effort to accelerate the reduction of borrowing costs for millions of households, aiming to stimulate consumption. According to sources who preferred not to be named discussing confidential information, certain banks are in the final stages of preparing for the upcoming adjustments in mortgage rates. According to one source, some homeowners might receive an immediate rate reduction of up to 50 basis points. However, the timeline for these changes is not yet finalised and could still be adjusted. The People's Bank of China and the National Financial Regulatory Administration did not respond to requests for comment.
Earlier this month, Bloomberg News reported that authorities are considering a plan to let borrowers renegotiate terms with their current lenders before January, the usual period when banks adjust mortgage rates. The proposed reductions are expected to occur in two stages, amounting to 80 bps. Policymakers are intensifying efforts to alleviate the financial burden on households due to sluggish domestic spending and increasing deflation risks. Although China has reduced average mortgage costs to a historic low this year, most families haven't reaped the benefits, as banks are set to reprice existing loans only next year. This discrepancy has frustrated some homeowners and led to a surge in early mortgage repayments.
This action coincides with an increasing number of Wall Street analysts predicting that China might not reach its economic growth target of around 5% for the year. Additionally, the ongoing decline in Chinese stock markets is worsening a crisis of confidence in the world's second-largest economy, adding to the pressure on policymakers. Data from China Real Estate Information Corp as of late August indicates that existing mortgages have an average interest rate of about 4%, while newly-issued loans carry lower rates, at 3.2% for a first home and 3.5% for a second home.
China's total outstanding mortgages, considered prime assets for Chinese banks, amounted to 37.79 trillion yuan (USD 5.3 trillion) at the end of June, the lowest figure in almost three years. Additional rate cuts would further strain banks, which have already experienced a decline in their margins to a record low of 1.54% as of the end of June, falling below the 1.8% level deemed necessary for maintaining reasonable profitability. Analysts at Shenwan Hongyuan Group estimated that homeowners could save over 300 billion yuan in annual interest expenses if an 80-basis point cut is implemented.
China's plan to lower interest rates on over USD 5 trillion worth of mortgages aims to alleviate financial pressure on households and boost consumption amidst sluggish domestic spending and deflation risks. While the move could offer substantial savings for homeowners, it poses challenges for banks already facing squeezed profit margins. This initiative reflects policymakers' efforts to restore confidence in the economy as growth targets and market stability come under increasing strain.
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