China's New Mortgage Loan Rate Calculated For Its Market-Driven Reform

China's New Mortgage Loan Rate Calculated For Its Market-Driven Reform
A model showing property project "Yulinyuanzhu" developed by Shanghai Red Star Macalline Real Estate Group is seen at a showroom in Xishuangbanna Dai Autonomous Prefecture, Yunnan Province, China, June 21, 2019. Picture taken June 21, 2019. (Photo: REUTERS/Lusha Zhang)

Come October 8, China's central bank will set the personal mortgage loan rate to a new lending rate reference to make it market-driven and flexible curbing housing risks by switching to a market-based reference rate.

For first-time home buyers, individual borrowers on the new mortgage loan rate will have an interest of no less than 4.85 percent in line with the five-year loan prime rate (LPR) which is the new reference of bank lending set by the People's Bank of China (PBOC).

The previous rate for first-time homebuyers was 4.90 percent. However, some banks used to give a 5 to 10 percent discount.

Second-time home buyers will have an interest rate of 0.6 percentage point above the LPR, which is 5.45 percent. Provinces can increase the rate based on local economic conditions.

The minimum interest rate based on the August 2019 LPR is a bit higher than the old rate of 5.4.

For mortgage contracts signed before October 8, the old interest rates will remain and so will the 28 trillion yuan (US$3.95 trillion) in unpaid mortgages.

A PBOC spokesman said that this old rate is "almost at the same level of the current lowest personal mortgage loan rate."

The spokesman also added that if you compare the current situation before the reform, "the interest expense will be basically unchanged."

Last week, Liu Guoqiang, vice-governor of the PBOC said last week that even with the new interest rate, mortgage loans will not be lower.

He also added that policymakers do not want to see further lowering in mortgage rates and will make sure they remain stable.

Beijing will not go easy on real estate so it can be used "to stimulate short-term economic growth."

The central banks said they it would make sure of the "effective implementation" of the "regional differential housing credit policy."

It will also "keep individual mortgage rates stable" to protect the rights of both borrowers and lenders.

This loan prime rate system is part of China's interest rate liberalization wherein 18 lenders chosen by the PBOC will submit their one-year and five-year LPR to the central bank monthly.

The central bank will get the average of these submitted rates and publish it every 20th of the month as a benchmark for the Chinese banking industry to follow.

Mortgage rates will get adjusted once a year.

China has long put a stop on speculative investment in the housing market since 2016 to stabilize prices and prevent asset bubbles.

Likewise, there are thoughts that high house prices are making the cost of running businesses expensive thereby restricting consumer spending. 

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