Finance Association news on October 31 (Reporter: Gao Ping) According to the arrangement, starting from November 1, 2024, eligible existing home loan borrowers can negotiate adjustments to the interest rate markup with commercial banks and also adjust the repricing cycle.

Today, multiple large banks including Bank of China and Agricultural Bank of China have announced the improvement of the pricing mechanism for existing individual housing loans, specifying the conditions triggering interest rate mark-up adjustments and how to apply for repricing cycle adjustments. Some banks have stated that starting from November 1 (inclusive of that day), customers can apply to adjust the interest rate mark-up or repricing cycle, while others have indicated that they will accept repricing cycle adjustment applications no later than November 15, 2024.

Regarding the repricing cycle, industry experts have told Finance Association reporters that within the same loan continuation period, customers can only apply for one repricing cycle adjustment, choosing a repricing cycle of 3 months, 6 months, or 12 months. The repricing cycle adjustment is irreversible. In a period of declining interest rates, the shorter the repricing cycle, the sooner customers can enjoy the benefits of lower interest rates. Conversely, in a rising interest rate period, the shorter the repricing cycle, the earlier the loan benchmark interest rate will be repriced.

The trigger condition for adjusting the interest rate markup is a deviation of 30 basis points.

In Announcement No. 11 of 2024 issued by the People's Bank of China, when the deviation between existing home loan interest rates and new national loan interest rates reaches a certain level, borrowers can dynamically adjust existing home loan interest rates through autonomous negotiations with banks.

The setting of the deviation level is a key aspect of the adjustment rules. If the deviation level is set too high, borrowers may feel a gap in their psychology, leading to increased prepayment and hindering the establishment of a long-term mechanism for the gradual and orderly adjustment of existing home loan rates. If the deviation level is set too low, it may result in frequent contract resets, exceed the bank's business capacity, and borrowers may find it difficult to enjoy discounts in a timely manner.

Finance Association reporters learned from relevant commercial banks that to balance reasonable benefits and sustainable business operations, after calculation, commercial banks have set the deviation level at approximately 30 basis points. For example, Bank of China stated that the bank offers commercial personal housing loans priced with LPR floating rates. If a customer's LPR markup is higher than the national average markup plus 30 basis points for new national loan rates, the customer can request an adjustment to the LPR markup. If it is not higher, no adjustment can be made. The national average markup for new national loan rates equals the latest published average interest rate for new national loans by the central bank minus the average value of the 5-year LPR published in each month of the corresponding quarter.

It is understood that the specific adjustment rule is to use the threshold of 30 basis points added to the point corresponding to the average interest rate of new national housing loans recently announced by the People's Bank of China. If the point addition of existing housing loans is higher than the threshold, it can be negotiated with the bank to adjust to the threshold. The corresponding point addition is the difference between the new national housing loan interest rate recently announced by the People's Bank of China and the average value of the corresponding quarter's LPR over 5 years or more. The 'Interest Rate Policy' section of the official website of the People's Bank of China announces the national new housing loan interest rate levels at the end of January, April, July, and October of each year for banks and borrowers to refer to.

For example, today, the People's Bank of China announced that the weighted average interest rate for new personal housing loans in the third quarter of 2024 was 3.33%. The average LPR for the period was 3.85%. The corresponding point addition is 3.33% - 3.85% = -52 basis points. Therefore, the adjusted threshold is -52 basis points + 30 basis points = -22 basis points. This means that borrowers with existing housing loans with point additions higher than -22 basis points can negotiate with the bank to adjust the point addition to -22 basis points. Industry insiders state that considering the majority of borrowers had their point additions adjusted to -30 basis points on October 25, it is expected that the majority of borrowers will not need to adjust their point additions during the fourth quarter of 2024.

Furthermore, experts suggest that in the foreseeable future, if policy rates remain stable, it is expected that new housing loan rates will remain stable, and existing housing loan rates will not need to be adjusted again. If the point addition for new housing loans further decreases, existing housing loan rates will also follow suit. Banks will comprehensively consider factors such as deposit absorption and operational costs to reasonably determine the new housing loan rates. After this round of batch adjustments, existing housing loan rates have decreased to 3.3%. If the difference between existing housing loan rates and new housing loan rates exceeds 30 basis points, it will drive a new round of reductions in existing housing loan rates. Therefore, it is expected that banks will issue very few housing loans with rates lower than 3%, and the gap between new and existing housing loan rates will remain generally stable.

The repricing cycle is divided into three options: three months, six months, and one year.

According to the Announcement No. 11 of the People's Bank of China in 2024, starting from November 1, 2024, for commercial individual housing loan borrowers whose contracts are based on floating rates, they can negotiate with banks and financial institutions to agree on the repricing cycle.

The repricing cycle refers to the time interval for adjusting the interest rate in floating rate loan contracts in accordance with the pricing benchmark. On the repricing date, the pricing benchmark will be adjusted to the value corresponding to the most recent month's loan market quoted interest rate (LPR). Currently, personal housing loans are generally repriced once a year, and Announcement No. 11 of the People's Bank of China cancels the administrative restriction stipulating the shortest repricing cycle for personal housing loans as 1 year. With November 1 approaching, some existing housing loan borrowers want to shorten the repricing cycle to enjoy the benefits of the LPR reduction in October as soon as possible.

Financial media reporters have found through bank announcements that after November 1, new housing loan borrowers can choose the repricing cycle autonomously, and existing housing loan borrowers can also negotiate with banks and financial institutions to redefine the repricing cycle. Most banks offer three options for the repricing cycle: three months, six months, one year. For a repricing cycle of three months, repricing occurs 4 times a year; for a repricing cycle of six months, repricing occurs 2 times a year; for a repricing cycle of one year, repricing occurs once a year. It is important to note that most banks stipulate that existing housing loan borrowers can only adjust the repricing cycle once throughout the loan term and cannot do so multiple times.

In an announcement released today, Bank of China indicates that customers can apply to the bank to change the repricing cycle, but within the same loan term, customers can only request an adjustment once. The adjusted repricing cycle can be chosen as three months, six months, or twelve months.

Experts indicate that the mortgage contract terms are generally longer, with some reaching 30 years. From the perspective of the entire loan period, the length of the repricing cycle has a neutral impact on borrowers. During the downward cycle of the LPR, the shorter the repricing cycle, the sooner borrowers can enjoy interest rate reductions. If the future economic situation improves and the policy rate and LPR enter an upward trend, during the period of rising interest rates, the shorter the repricing cycle, the faster borrowers will apply higher interest rates and bear the burden of rate hikes sooner. The repricing cycle can only be adjusted once, and borrowers should consider their own situation carefully and make a prudent decision to make the most of this opportunity.

How to apply?

Bank of China stated that starting from November 1, 2024 (including that day), the bank can accept customer applications to adjust the markup value and repricing cycle of existing housing loans. It is worth mentioning that for fixed rate/prime rate loans, customers need to apply first to switch to LPR floating rate loans before applying to adjust the LPR markup value.

Bank of China mentioned that borrowers can choose to adjust the repricing cycle or markup value separately, or apply for both adjustments together. For example, in the mobile banking app, if a customer applies to adjust the markup value, the system will automatically determine if the loan rate meets the adjustment rules. If it does not comply, the adjustment option will not be displayed. Applying to adjust the markup value has no limit on the number of times and can be done as long as the conditions for a rate reduction are met.

Additionally, for adjusting the repricing cycle, on the adjustment page, select 'Yes' and choose the repricing period (can be adjusted to 3, 6, 12 months). The system will automatically calculate the next repricing date based on the adjusted repricing period.

How is the 'First Switch' loan in Beijing, Shanghai, and Shenzhen handled? Bank of China explains that if there is a lower limit on housing loan interest rates in the city, the adjusted markup value of the interest rate will be the higher of the normalized adjustment target value (i.e., the national markup value for new housing loans + 30BP) and the local lower limit of the interest rate policy. If the local lower limit is higher than the normalized adjustment target value, the adjusted housing loan markup value cannot be lower than the local housing loan interest rate policy lower limit.

It should be noted that different banks have different application timelines. For example, agricultural bank of china has stated that from November 1, 2024, eligible existing housing loan customers can request adjustments to the markup rate. Additionally, customers with floating rate mortgages can apply to adjust the repricing cycle to 3, 6, or 12 months. After the loan is issued, the repricing cycle can only be adjusted once during the loan contract period. Repricing cycle adjustments will take effect on the day of the adjustment. The bank will accept applications no later than November 15, 2024.

21 national banks have completed batch adjustments totaling 25.2 trillion yuan in existing housing loan rates, resulting in rate reductions.

On October 25, national banks conducted batch adjustments for eligible existing housing loan borrowers, with relevant borrowers gradually reporting that they have received loan bank mobile text notifications, indicating that the mortgage interest rate has been successfully adjusted, and some borrowers have seen a reduction of up to 130 basis points. Caixin reporters learned that the bulk adjustment of existing housing loan interest rates has been basically completed. This adjustment covers first-home, second-home, and above-existing housing loans, as well as existing housing loans that were adjusted for point additions last year, with adjustment intensity and coverage both surpassing last year.

Preliminary statistics show that as of October 28, 21 national banks have completed batch adjustments, totaling 53.667 million transactions of existing housing loans amounting to 25.2 trillion yuan for rate reductions. Local legal person banks across the country are also set to complete batch adjustments by October 31.

Caixin reporters have learned that due to different reset dates for mortgage interest rates, the adjusted rates for different borrowers will vary until they are all the same after the reset, in a step-by-step realization of the effects of the bulk adjustment of existing housing loan rates. Currently, for some borrowers with reset dates after October 21, their existing housing loan rates have already dropped to 3.3%. As the remaining housing loans are resettled one after another, the majority of participating existing housing loan rates will decrease to 3.3%, close to the latest average level (3.33%) of new personal housing loan interest rates nationwide in the third quarter of 2024 as published on the official website of the People's Bank of China.

In the view of industry insiders, the adjustment of existing housing loan rates has a largely neutral impact on commercial banks' net interest margins. On the one hand, the recent reduction in policy rates by the People's Bank of China, specifically 0.2 percentage points for the 7-day reverse repurchase operation rate and a 0.3 percentage point decrease in the medium-term lending facility (MLF) rate, has lowered the cost for financial institutions to obtain funds from the central bank. On October 18, the interest rate self-regulation mechanism led major banks to lower the listed deposit rates for various terms and types, with fixed-term deposits for various terms all being lowered by 25 basis points, and local legal person banks also followed suit by lowering their listed deposit rates. On the other hand, a reduction in existing housing loan rates has narrowed the interest rate differential between new and old housing loans, leading to a noticeable decrease in early repayments.

Caixin reporters learned from a major bank that since October, early repayments of housing loans have decreased by 20% compared to September before the policy was rolled out, which is beneficial for stabilizing the asset side earnings of banks. Overall, the impact of lowering existing housing loan rates and other monetary policy measures on commercial banks' net interest margins is largely neutral.

Editor/Somer