Existing home loan interest rates are lowered! Authoritative answers to seven major questions

The long-awaited reduction in existing home loan interest rates has finally been confirmed!

On the evening of September 29th, the central bank issued an announcement, clearly improving the pricing mechanism for home loan interest rates; the market interest rate pricing self-discipline mechanism issued the "Proposal on Bulk Adjustment of Existing Home Loan Interest Rates" (referred to as the "Proposal").

According to the spirit of the above document, commercial banks will make bulk adjustments to existing home loan interest rates by October 31st. This preferential policy will cover first homes, second homes, and above.

Reporters learned from the four major banks that the relevant banks will actively respond to the requirements, proactively address customer concerns, and are actively preparing to adjust existing home loan interest rates. The relevant banks plan to announce operational matters on October 12th and make unified bulk adjustments by October 31st.

This will be the final bulk adjustment of existing home loan interest rates in China. In the future, a long-term mechanism for gradual and orderly adjustment of existing home loan interest rates will be established.

How much discount will existing home loan borrowers enjoy, when will they start enjoying the discount, and what operations are required?

The authoritative interpretation by Shanghai Securities Journal addresses seven key issues involved in this adjustment!

Issue One: How low can existing home loan interest rates be adjusted?

The most concerning issue for borrowers is, after this bulk adjustment, to what level can existing home loan interest rates be reduced?

Currently, the majority of home loans in China are priced with floating interest rates, which are based on the loan prime rate (LPR) + a spread, with the spread being a fixed value agreed upon in the contract.

According to the "Proposal," during the bulk adjustment phase, for existing home loans with a spread greater than -30 basis points, the spread will be adjusted to not less than -30 basis points, and not lower than the lower limit of the spread for new home loans currently in effect in the city.

After reviewing, it was found that except for second homes and above in Beijing, Shanghai, and Shenzhen, the interest rates for other existing home loans can be lowered to the level of LPR-30 basis points.

Second homes and above in Beijing, Shanghai, and Shenzhen can be adjusted to the lower limit of the spread for new home loan policies.

In other words, after this adjustment, the interest rates for second homes and above in Beijing will be adjusted to: within the Fifth Ring Road at LPR-5 basis points, and outside the Fifth Ring Road at LPR-25 basis points.

In Shanghai, the interest rates for second homes and above will be adjusted to: LPR-25 basis points in the Free Trade Zone, Lingang New Area, Jiading, Qingpu, Songjiang, Fengxian, Baoshan, and Jinshan districts; and LPR-5 basis points elsewhere.

In Shenzhen, the interest rates for second homes and above will be adjusted to: LPR-5 basis points.

Issue Two: How much interest expense can be saved?

The reduction in existing home loan interest rates this time will bring real benefits to borrowers.

According to the central bank, as of the end of July, the weighted average interest rate for all existing home loans was about 4.06%, while the average interest rate for new home loans nationwide in the first 8 months was 3.61%.

After the adjustment, existing home loan interest rates will be reduced to around LPR-30 basis points, calculated at 3.55% based on the latest 5-year LPR (3.85%), a decrease of about 0.5 percentage points from the pre-adjustment rate of 4.06%Using a 1 million RMB, 25-year, equal principal and interest repayment existing housing loan as an example, borrowers can save approximately 5,600 RMB in interest expenses per year.

Nationwide, this batch of rate cuts will benefit 50 million households and 150 million people, reducing household interest expenses by an average of 150 billion RMB per year.

Experts believe that the rate cut for existing housing loans will help borrowers further reduce their mortgage interest expenses, boost consumer willingness to spend, stabilize homebuyer expectations, and increase confidence.

Question Three: When can borrowers start enjoying the benefits?

Existing housing loan borrowers will be able to enjoy the benefits of this batch adjustment by October 31st at the earliest.

According to the "Initiative," commercial banks are generally required to uniformly implement batch adjustments to existing housing loan rates by October 31st.

Reporters have learned that Industrial and Commercial Bank of China (ICBC) will ensure the completion of batch adjustments by October 31st, while Agricultural Bank of China (ABC) will implement uniform batch adjustments before October 31st.

Question Four: What actions do borrowers need to take?

Reporters have learned that major commercial banks are generally required to release detailed operational guidelines no later than October 12th to address customer concerns promptly.

Based on historical experience, the customer experience of batch adjusting existing housing loan rates in China has been positive.

In August 2023, China conducted a batch adjustment of housing loan rates. Most commercial banks met the adjustment needs of customers through online channels such as online banking and mobile banking with a "one-click operation" process, without requiring customers to perform additional complex operations offline, resulting in a smooth customer experience.

Question Five: How will the adjustment of existing housing loan rates on different repricing dates be handled?

Since each borrower has a different loan repricing date, the rates for different borrowers will vary after the batch adjustment.

Experts indicate that the main reason for the rate decrease after the batch adjustment is a decrease in the markup rate to -30 basis points. However, after repricing, the rate decrease in the most recent pricing cycle of the Loan Prime Rate (LPR) will also be reflected. Borrowers participating in this batch adjustment will have their rates adjusted to the same level.

Borrowers with different repricing dates can refer to the following table to determine their own existing housing loan rate adjustment situation.

For example, assuming a batch adjustment on October 31st, with the latest 5-year LPR as of October 21st following the central bank policy rate decrease by 0.2 percentage points, dropping from the current 3.85% to 3.65%. Since the 5-year LPR has decreased by a total of 0.35 percentage points in February and July this year, for existing housing loans repriced on January 1st, the rate after this batch adjustment will be 3.9% (calculated based on a 4.2% LPR), and the rate after the repricing of the LPR on January 1st next year will be 3.35% (calculated based on a 3.65% LPR).

Question Six: What arrangements are in place for the long-term mechanism?

Reporters have learned that this will be the final batch adjustment of existing housing loan rates in ChinaIn the future, China will establish a long-term mechanism for the gradual and orderly adjustment of existing housing loan interest rates.

"As the term of housing loan contracts is generally long, a fixed markup rate cannot reflect changes in borrower credit, market supply and demand, and other factors. Once the market situation changes, it is easy for the interest rate differential between new and old housing loans to widen." A relevant official from the central bank stated that it is necessary to optimize the institutional design to facilitate commercial banks and borrowers to modify contracts in an appropriate manner.

To address both immediate and fundamental issues and fundamentally solve the problem of interest rate differentials between new and old housing loans, the central bank will establish a long-term mechanism for the gradual and orderly adjustment of existing housing loan interest rates.

Specifically, if future new housing loan interest rates continue to decline, when the interest rate of existing housing loans deviates significantly from the national average interest rate for new housing loans, borrowers can negotiate with banks to apply for a reduction in the interest rate of existing housing loans to a level near that of new housing loans.

"As a result, there is no need to wait for a significant accumulation of interest rate differentials between new and old housing loans before commercial banks make bulk adjustments, which can gradually and orderly alleviate conflicts." A relevant official from the central bank stated.

Starting from October 2024, in the first month of each quarter, the central bank will publish the weighted average interest rate for new commercial individual housing loans nationwide in the previous quarter on its official website for reference by banks and borrowers.

Question Seven: What are the new arrangements for the repricing cycle of housing loan interest rates?

The announcement also removes the restriction that the shortest repricing cycle for housing loan interest rates is one year.

Therefore, for newly signed individual housing loan contracts, starting from November 1st, the repricing cycle can be independently negotiated by both the borrower and lender. The repricing cycle can be on an annual, semi-annual, quarterly basis, etc.

"It should be noted that in a declining interest rate phase, the shorter the repricing cycle, the earlier the borrower can enjoy lower interest rates. However, in a rising interest rate phase, the borrower will also have to bear higher interest rates sooner." Experts stated