Q1: What is the background for the launch of the Announcement?
A1: To smooth the channels of monetary policy transmission and facilitate lower financing costs for the real economy, the People’s Bank of China (PBOC) reformed and improved the loan prime rate (LPR) formation mechanism in August 2019 to ensure that loan interest rates could promptly reflect changes in market interest rates. When issuing the Announcement No.16 [2019], we improved the LPR formation mechanism, and took into account the wide range, long maturity, and high public attention regarding commercial personal mortgage loans (hereinafter referred to as “mortgages”). The Announcement specified that mortgage rates should be priced as LPR plus basis points (LPR+bps) to make long-tenor mortgage rates in sync with market rates. In short, the Announcement played a significant role in promoting the market-oriented pricing of mortgage rates and supporting the stable and healthy development of the real estate market. However, deepened market-oriented interest rate reform and significant changes in the supply-demand relationship in the real estate market have exposed some shortcomings in the current pricing mechanism, which aroused public concerns and sorely needed adjustments.
To implement the guidelines of the meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee and to address public concerns, the PBOC issued the Announcement No.11 [2024], which refined the pricing mechanism for mortgage rates and fostered lower interest rates on existing home loans.
Q2: What are the problems with the current mortgage rate pricing mechanism, and how will they be addressed?
A2: As agreed in contracts, the bps added to the LPR are fixed during the contract periods. As home mortgage contracts are long tenors in general, the fixed margin between mortgage rates and LPR cannot reflect changes in the borrower’s credit worthiness or shifts in market supply and demand, which may lead to widening spread between old and new mortgage rates as market conditions change. With the deepening of market-oriented interest rate reform, it has become necessary to optimize the system so that commercial banks and borrowers could adjust contracts in an appropriate manner.
In August 2023, in response to public concerns and following a quick-response mechanism, the PBOC, together with the National Financial Regulatory Administration guided commercial banks to adjust interest rates on existing home loans in bulk by negotiating rate changes in mortgage contracts. This move has delivered effective results. However, the spread between new and old mortgage rates has recently widened again due to the fixed additional bps under the current pricing mechanism. Commercial banks will take coordinated steps to lower in bulk the interest rates on qualified existing mortgages to levels close to the newly-issued nationwide, but this provides a temporary fix only. The fundamental solution to the spread is to further deepen the market-oriented interest rate reform, which will, while maintaining the integrity of contracts, remove institutional barriers that hinder commercial banks and borrowers from negotiating and adjusting terms of existing mortgages based on market-oriented principles.
Q3: What are the main changes in this Announcement?
A3: The Announcement No.11 [2024] of the PBOC includes the following major improvements. First, the bps added to LPR is adjustable. Both borrowers and lenders may adjust the LPR+bps by negotiating about contract changes to better reflect developments in market supply and demand as well as the borrower’s risk premium. In the future, market competition may drive commercial banks to negotiate with borrowers over LPR+bps adjustments in a timely manner before the spread between old and new mortgage rates becomes too wide. This will gradually ease tensions and maintain the integrity of contracts.
Second, the one-year restriction, the shortest re-pricing cycle for mortgage rates has been lifted. From November 1, 2024 onwards, for new adjustable-rate mortgage contracts, the re-pricing cycle can be negotiated by both parties, in sync with the re-pricing cycle for other adjustable-rate loans. Borrowers with qualified existing mortgages can also adjust their re-pricing cycle when negotiating changes to the LPR+bps, so as to ensure that the interest rates on existing home loans promptly reflect LPR changes, thus smoothing the channels of monetary policy transmission.
Q4: How will the interest rates on existing home loans be adjusted after the launch of the Announcement?
A4: The self-regulatory pricing mechanism for market interest rates will propose an initiative to guide commercial banks to adjust the interest rates on existing home loans in bulk by October 31, 2024. Commercial banks will release relevant announcements and detailed adjustment plans to uniformly lower the LPR+bps for mortgage rates in the most convenient manner for borrowers. Most borrowers will be able to complete the adjustment through online banking or mobile banking channels with just one click and won’t need to visit bank outlets. Please stay updated by following the relevant information published by your lender. After the adjustments in bulk, both borrowers and lenders can, based on market-oriented principles, further negotiate and dynamically adjust the interest rates on existing mortgages according to the Announcement No.11 [2024] of the PBOC.
