The lower limit of interest rates for the first home loan in 31 locations has been fully announced! Which cities have greater adjustment space?

Introduction: Considering the current mainstream interest rate level, second -, third -, and fourth tier cities may have greater room for adjustment.

Author | Qi Ning from First Financial

On August 31st, with the release of two notices by the People's Bank of China and the State Administration of Financial Supervision and Administration, the interest rate of existing housing loans officially welcomed a preliminary adjustment plan, and the lower limit of the minimum down payment ratio for national commercial personal housing loans was also uniformly adjusted.

However, there are still many details that need to be clarified, from the introduction of national plans to the implementation of city specific policies. Especially for the adjustment of existing housing loan interest rates, regardless of which adjustment method the borrower chooses - the replacement of the first commercial personal housing loan by a new loan issued by a financial institution, or the negotiation of changing the interest rate level agreed upon in the contract - the adjusted existing housing loan interest rate cannot be lower than the lower limit policy of the local housing loan interest rate at the time of loan issuance.

This also means that the lower limit of the interest rate at the time of issuance is crucial to whether the borrower can ultimately benefit and how much they will benefit. However, due to significant changes and differences in the lower limit policies of mortgage interest rates implemented in different stages and cities, clarifying this reference indicator becomes a prerequisite for smooth negotiations between borrowers and banks.

As of September 2nd, all 31 provinces/municipalities/autonomous regions in China have announced the self regulatory lower limit of interest rates for first commercial housing loans. A real estate industry researcher told reporters that due to significant differences in the lower limit of historical mortgage interest rates implemented in each region, the overall executable space still needs to wait for banks in various regions to come up with a unified calculation plan.

However, some institutions have pointed out that in the process of implementing the adjustment of interest rates for existing housing loans, there is a lot of room for independent negotiation between banks and borrowers. In addition to considering the lower limit of interest rates specified by the central bank at the time of issuance, it is also likely to consider the current mainstream interest rate level for first homes in various cities, and the adjusted interest rate is expected to not be lower than this. If considered based on this, second -, third -, and fourth tier cities with significant adjustments in interest rates for first-time home loans in recent years may have greater room for adjustment. For first tier cities, on the one hand, most existing mortgage loans are executed closely following the lower limit of interest rates, and on the other hand, mortgage interest rates are relatively rigid, so there is limited room for adjustment.

Another factor that affects the adjustment space is the "house recognition but not loan recognition" policy. Some mortgage interest rates that were originally recognized as second homes but are now recognized as first homes will have an opportunity for adjustment, and there is more room for adjustment.

Multiple regions have announced the lower limit of interest rates for first-time home loans

From a national perspective, the lower limit of the interest rate for the first commercial personal housing loan in China at different stages is: before October 7, 2019, it was 0.7 times the loan benchmark interest rate; The period from October 8, 2019 to May 14, 2022 is LPR; From May 15, 2022 to present, it has been LPR-20BP.

However, under the context of city specific policies, there is a significant difference in the lower limit of mortgage interest rates implemented between different regions or at different times within the same region. According to the "2022 Third Quarter China Monetary Policy Implementation Report", China's commercial personal housing loan interest rates adopt a "three-layer pricing mechanism": firstly, at the national level, the People's Bank of China and the China Banking and Insurance Regulatory Commission determine the lower limit of loan interest rate policies at the national level; Secondly, at the local level, each city government determines the lower limit of local commercial personal housing loan interest rates based on the national policy bottom line and the principle of "implementing policies according to the city"; Thirdly, at the level of commercial banks, they comprehensively consider factors such as cost of funds and credit risk, and negotiate with borrowers to determine the specific interest rate level.

On August 31st, the People's Bank of China and the State Administration for Financial Supervision and Administration of China issued a notice on matters related to reducing the interest rates of first home loans on stock. Local central bank branches have successively disclosed the lower limit of interest rates on first home loans in the past. While providing reference for adjusting the bottom line of interest rates on stock housing loans, they have also comprehensively presented the adjustment amplitude and frequency of interest rates on housing loans in various regions since 2018 and 2016.

According to incomplete statistics from First Financial News, as of September 2nd, 31 provincial-level administrative regions including Beijing, Shanghai, Shenzhen, Guangzhou, and Tianjin have all announced the self regulatory lower limit of interest rates for their first commercial personal housing loans.

According to the requirements of the Notice, starting from September 25, 2023, upon the borrower's application to the lending financial institution, the commercial personal housing loan for the first housing unit in stock can be adjusted in two ways: first, the financial institution can issue a new loan for replacement, and second, both parties can negotiate to change the interest rate level agreed upon in the contract.

Before August 31, 2023, commercial personal housing loans for the first housing that have been issued by financial institutions or those that have signed contracts but have not been issued, or other commercial personal housing loans for existing housing that meet the first housing standards in the city where the borrower's actual housing situation is located, are all within the adjustment range.

It should be noted that regardless of the method of adjustment, the adjusted mortgage interest rate shall not exceed the lower limit of the commercial personal housing loan interest rate policy for the first home in the city where the original loan was issued by adding points to the LPR. Borrowers can refer to the attached table after the inquiry to determine if there is still room for adjustment in their existing mortgage.

Simply put, if the existing housing loans are issued in accordance with the local interest rate lower limit policy at that time, there is no need to adjust this time, especially when choosing to anchor LPR loans for pricing benchmark conversion, the interest rate level is already the lowest with LPR repricing every year. There are three main situations in which borrowers can benefit from the adjustment policy of existing housing loans:

1. Existing loans were issued after the LPR reform in October 2019, and the LPR bonus stipulated in the loan contract exceeded the corresponding bonus of the lower limit policy at the time of issuance. There is room for a downward adjustment, and the calculation is relatively simple.

2. Existing loans are issued before October 2019, and borrowers choose a fixed interest rate during the pricing benchmark conversion, which is higher than the lower limit of the interest rate at the time of issuance, and there is room for a downward adjustment.

3. The existing loans will be issued before October 2019, and the borrower chooses to anchor the LPR during the pricing benchmark conversion. However, due to this situation, the determination of the lower limit of the interest rate for issuance still needs to be confirmed by the bank, and the specific adjustment space depends on the negotiation results between both parties.

Which cities have greater adjustment space?

However, in addition to the lower limit of interest rates at the time of issuance, borrowers also need to consider the latest mainstream interest rate level in their city and changes in the recognition criteria for their first home, which will affect the adjustment space of existing mortgage interest rates.

When answering questions from reporters about adjusting and optimizing housing credit policies, officials from the People's Bank of China and the State Administration of Financial Supervision and Administration stated that the background of the "Notice" is that there have been significant changes in the supply and demand relationship of China's real estate market in recent years, and borrowers and banks both have demands for orderly adjustment and optimization of assets and liabilities. The decrease in interest rates on existing housing loans can save interest expenses for borrowers, which is beneficial for expanding consumption and investment. For banks, it can effectively reduce the phenomenon of early repayment of loans and mitigate the impact on their interest income. At the same time, it can also compress the space for illegal use of business loans and consumer loans to replace existing housing loans, reducing risks and hidden dangers. In order to better adapt to the new situation mentioned above, the People's Bank of China and the State Administration of Financial Supervision and Administration have clearly supported and encouraged banks and borrowers to negotiate and adjust the interest rates of existing first home loans in accordance with the principles of marketization and rule of law.

Some banking researchers believe that if the housing loan interest rate policy in some cities remains rigid in recent years, and the pricing difference between existing and newly issued housing loans is not significant, the space and necessity for reducing the interest rate of existing housing loans will be greatly reduced.

In the second quarter monetary policy execution report, the central bank mentioned that as of the end of June this year, out of all 343 cities, 100 cities have lowered or cancelled the lower limit of interest rates for first-time home loans. Among them, 87 cities have lowered the lower limit of first home loan interest rates, which is 10-40 basis points lower than the national lower limit, and 13 cities have cancelled the lower limit of first home loan interest rates.

According to China International Capital Corporation (CICC), since 2022, the downward trend of the first new home loan issuance has been approximately 135bp. The Lin Yingqi team, Chief Analyst of China International Capital Corporation (CICC) Banking, pointed out that since last year, second and third tier cities have generally significantly reduced the rate of mortgage loans. It is expected that the reduction in existing mortgages in second and third tier cities will be more significant this time, while the adjustment in first tier cities will be less. Especially if the issuance is already close to the lower limit of interest rates, there is no room for interest rate reduction.

Regarding the specific reduction amount, Lin Yingqi pointed out that it is preliminarily estimated that the proportion of first-time home loans to all existing home loans is about 80% to 90%, of which about 80% are eligible for mortgage reduction, and the proportion of loans involved is about 2/3 of all mortgage loans. The interest rate of all existing mortgage loans has decreased from about 4.7% to around 4.2% of the 5-year LPR level, with an overall average reduction of about 50bp. "Due to the complexity of the regions and interest rate levels involved in actual loans, the downward trend of actual interest rates needs further implementation of detailed rules," Lin Yingqi said in the report.

Previously, a reporter from First Financial News learned that after adjusting the interest rate of commercial personal housing loans for the first available housing, the financial burden of millions of households and billions of residents will significantly decrease, with an average decrease of about 0.8 percentage points. According to central bank data, as of the end of June this year, the balance of personal housing loans in China was 38.6 trillion yuan.

It is worth noting that for the scope of interest rate adjustment applicable to existing housing loans, the Notice specifies that it includes not only the first personal housing loan already issued, but also other existing loans for borrowers whose actual housing situation meets the first housing standard in their city. This also indicates that with the implementation of "buying a house but not a loan" in more cities, some loans that were originally applicable to second home interest rates may also benefit from it. Firstly, families with loan records in other places who have purchased a house locally, and secondly, local "sell one buy one" replacement families.

According to the Q&A of Industrial and Commercial Bank of China, for existing loans that were previously processed based on the interest rate for second home loans, it can be preliminarily judged based on the current city policy that they are executed according to the policy for first home loans and meet the conditions for adjusting the interest rate for existing housing loans. It is recommended that customers prepare supporting materials in advance. Subsequently, the bank will issue operational guidelines.

Industrial and Commercial Bank of China also stated that the bank is actively preparing for various preparations and tentatively opens online and offline service channels on September 25th. The specific processing time is subject to the announcement.

Because the lower limit of interest rates for second home loans is often higher, there may be more room for adjustment for these two types of households after "buying a house but not a loan".

Taking the Beijing area as an example, if citizen A replaces their property in 2020, their mortgage interest rate will be 5.9% at the time of issuance, and currently it is 5.35% at LPR+115BP. After Beijing announced on September 1st that it would accept a house but not a loan, the property held by citizen A can be recognized as the first home. According to the lower limit of the local first home interest rate LPR+55BP in February 2020, the loan interest rate can be reduced from the current 5.35% to 4.75%.

Since August 18th, when the three departments jointly issued a document clarifying the inclusion of "housing recognition but not loan recognition" in the "One City, One Policy" toolbox, it has been implemented in many places such as Wuhan, Zhongshan, Huizhou, Dongguan, Chengdu, and Chongqing. In particular, the four major first tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen have all been officially announced and implemented. Chen Wenjing, Director of Market Research at Zhongzhi Research Institute, told reporters that this is expected to drive more cities to follow up and implement relevant measures, and the policy signal is clear.

The self-discipline lower limit of interest rates for the first commercial personal housing loan in 31 regions