Mortgage prepayment trend may ease

As confidence recovers, homebuyers shift focus to consumption, securities

Supported by the sound fundamentals of China's economy and the expected improvement of its capital market performance this year, the trend of homebuyers prepaying their mortgages is likely to gradually subside, as they seek higher returns elsewhere, experts said.

With the optimization of the country's COVID-19 measures and the implementation of comprehensive measures to stabilize economic growth in 2023, the Chinese economy is expected to recover steadily and people's expectations for future income growth are likely to improve, said Ye Yindan, a researcher at the BOC Research Institute.

At the same time, the performance of China's capital markets will also get better this year as its economy is expected to remain in good shape while the US and European economies may slow. Because of these factors, the wave of mortgage prepayments is likely to fade step-by-step this year, thus reducing pressure on banks, Ye said.

Since China established a dynamic adjustment mechanism on mortgage rates for first-time homebuyers in January, many cities have lowered the floor on their mortgage rates, dropping below 4 percent.

A large number of mortgage borrowers have accelerated the pace of prepaying their mortgages since the second half of 2022. After the Spring Festival holiday this year, some homebuyers who received year-end bonuses became increasingly enthusiastic about mortgage prepayments to relieve the debt burden.

In mortgages, the collateral is the home, which is of good asset quality. The weighted average mortgage rate is also higher than the weighted average interest rate of corporate loans, not to mention mortgages having longer maturity periods. Therefore, commercial banks are unwilling to encourage homebuyers to prepay mortgages, experts said.

"In the current market environment, home buying demand is still weak and new mortgages are growing slowly. Given this backdrop, a wave of mortgage prepayments will lead to shrinkage in the balance of mortgages and upset the rhythm of banks' allocation of funds," Ye said.

To cope with the pressure, many banks have raised the threshold for prepaying mortgages, such as limiting the amount and frequency of prepaying and closing online channels for scheduling appointments for mortgage prepayments.

The waiting period for prepaying mortgages at major banks in cities like Beijing, Shanghai and Shenzhen, Guangdong province, has also been significantly extended since the beginning of this year, with the waiting period exceeding six months at some banks.

However, if China's economy continues to stabilize and recover, and the real estate market gradually picks up in 2023, the tide of mortgage prepayments may tend to flatten, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co.

"If effective measures are taken to reduce mortgage prepayments and guide people to transform their savings into consumption and investment, it will provide strong support for the expansion of consumption and the acceleration of economic and social recovery," Dong said.

He advised the government to take quicker steps in adopting measures such as reducing down payment ratios and lowering interest rates of existing mortgages.

Financial regulators could guide commercial banks to reduce the interest rates of existing mortgages through the market interest rate pricing self-discipline mechanism. For example, discounts or other preferential policies can be provided for existing mortgages for which interest rates are too high. This will narrow the difference between the interest rates of existing and new mortgages, reduce the debt burden on homebuyers and solve the issue of a large number of people prepaying mortgages, Dong said.

In the meantime, the People's Bank of China, the central bank, should continue to guide moderate reductions in loan prime rates, China's market-based benchmark lending rates, especially the over-five-year LPR, he said.

"Taking the long view, commercial banks will see increasing difficulties in continuing to take mortgages and the net interest margin as main contributors to their profits. Therefore, banks must make transitions to avoid falling into a passive position after clients have changed their asset allocation preferences," said Ye with the BOC Research Institute.