Efforts to narrow interest gap for housing seen paying off

China's implementation of adjustment mechanisms to narrow the gap between the interest rates of existing and newly issued mortgages has triggered a cut of existing home loan interest rates on the first day of 2025, and industry experts suggest there is still downward adjustment room considering the moderately loose monetary policy.

For commercial housing loan borrowers who peg their home loan interest rates to the latest loan prime rate readings — the pricing benchmark — on Jan 1, they may have seen a substantial reduction in mortgage rates nationwide on Wednesday, according to authoritative sources.

"About 80 percent of our customers chose Jan 1 as the loan adjustment date, and many of them can benefit from the decline of interest rates," Xu Tingting, head of a Beijing-based branch of Bank of Nanjing, was quoted by Xinhua News Agency as saying.

Xu said a sizable drop of 60 basis points was made on the over-five-year LPR in 2024, on which many lenders based their mortgage rates.

"Taking the 30-year 1 million yuan ($137,000) fully amortized mortgage for example, the monthly payment would be reduced by more than 300 yuan," Xu said.

On Nov 1, China initiated a normalized adjustment mechanism on the interest rates of existing mortgages. Under the mechanism, borrowers are eligible to negotiate with banks on the repricing cycle of their existing home loan interest rates in accordance with the latest LPR reading, according to statements from China's six major commercial banks.

Differing from the previous annual repricing cycle, the new policies allow home loan borrowers to make a choice among three options, which are three months, six months and one year.

Individual mortgage loan owners who borrow under the housing provident fund program would find that their personal home loans borrowed before May 18, 2024 get adjusted according to the corresponding interest rates for both first and second homes since Jan 1, according to a notification published by the People's Bank of China on May 17.

Also taking the 30-year 1 million yuan fully amortized mortgage as an example, monthly payments will shrink from 4,270.16 yuan to 4,135.57 yuan, and a total of 48,500 yuan in interest expenses will be saved, CCTV.com reported.

It is worth noting that both the interest rates for commercial housing mortgages and loans under the housing provident fund program can be adjusted automatically, and eligible homebuyers do not require any additional applications.

The latest batch of mortgage rate adjustments is aimed at narrowing the interest rate gap between existing mortgages and newly borrowed ones, and up to 50 million households — or 150 million people — will be affected, with about 150 billion yuan in interest expenses being reduced per year, reported Chinese financial news outlet Yicai.

The adjustment to existing mortgage interest rates will help ease payment pressure on individual borrowers and boost consumption, said a Zhongtai Securities research report.

Saving 300 yuan in monthly payments for individual homeowners may create some 100 billion yuan in consumption potential, it suggested.

Ming Ming, chief economist of CITIC Securities, said he believes the LPR still has room for further downward adjustments, considering the central bank's stance on easing monetary policies.

Looking forward to 2025, China's central bank is expected to implement interest rate cuts amid the current moderately loose monetary environment, and an LPR cut will likely follow, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

"It is likely that the over-five-year LPR will get lowered significantly in 2025, an effective methodology of interest rate cuts for homeowners. And this can be regarded as a key strategy in promoting real estate market stabilization," Wang said.