BEIJING, August 31 (TMTPost) -- On Thursday evening, the People's Bank of China and the National Administration of Financial Regulation jointly issued two documents, namely the "Notice on Matters Related to Reducing the Interest Rate of Existing First Home Loans" and the "Notice on Adjusting and Optimizing Differentiated Housing Credit Policies."

The key takeaways of the two notices are as follows:

Regarding the "Notice on Matters Related to Reducing the Interest Rate of Existing First Home Loans"

1. Clarify the reduction of interest rates for existing first home loans.

Starting from September 25, 2023, borrowers of existing first home commercial personal housing loans can apply to the financial institutions for new loans to replace the existing first home housing loans.

2. Which existing first home loans are eligible for applying for interest rate cuts?

Existing housing loans that have been issued by financial institutions before August 31, 2023, and have signed contracts but have not been disbursed, as well as existing personal housing loans for commercial purposes that meet the first home standards in the borrower's actual housing situation in the city.

3. The specific reduction of interest rate for existing loans needs to be determined through voluntary negotiation, but it cannot be lower than the lower limit of the new home loan interest rate policy in the city at that time.

The interest rate level of the new loans is determined through voluntary negotiation between financial institutions and borrowers, but the spread over the Loan Prime Rate (LPR) in the loan market shall not be lower than the lower limit of the interest rate policy for existing first home commercial personal housing loans in the city at the time of loan disbursement. In other words, it cannot be lower than the lower limit of the new home loan interest rate policy in the city at that time.

Finally, good news for ordinary homebuyers

Due to the high housing loan interest rates in the past few years, there has been a high demand for lowering the interest rates on existing housing loans. According to statistics, the housing loan interest rates from the end of 2017 to the end of 2021 have been consistently high, nearly 140 basis points higher than the current rate of around 4.14%. For a 1 million yuan housing loan with a 20-year repayment period under the equal principal and interest method, the difference in total interest between a 4.14% interest rate and a 5.5% interest rate will exceed 180,000 yuan, which is a significant amount for an ordinary family.

Therefore, a reasonable reduction in the interest rates on existing housing loans can effectively reduce the repayment pressure on residents, thereby boosting their payment ability and consumer confidence, and providing more opportunities for homebuyers. At the same time, it can reduce the occurrence of early repayment and loan replacement situations, promote consumer spending, benefit the real estate market, and stimulate economic development.

However, the reduction of interest rates on existing first-home loans puts some pressure on the interest income of banks and other financial institutions, which will have a certain impact on commercial banks' earnings. However, major banks have recently stated that they have prepared plans for adjusting the interest rates on existing housing loans, and on the evening of the 31st, Agricultural Bank of China and China Construction Bank quickly issued announcements, stating that they will promote the work of reducing the interest rates on existing first-home commercial individual housing loans in accordance with the law and in an orderly manner. It is expected that there will be negotiations on the specific extent of the interest rate reduction in order to get a share of the benefits.

Regarding the "Notice on Adjusting and Optimizing Differentiated Housing Credit Policies"

1. Unified national policy on the minimum down payment ratio for commercial individual housing loans: not less than 20% for the first home and not less than 30% for the second home.

There is no longer a distinction between cities that implement "purchase restrictions" and cities that do not. For resident households that purchase commercial personal housing with loans, the minimum down payment ratio for the first home loan is unified at no less than 20%, and the minimum down payment ratio for the second home loan is unified at no less than 30%.

2. Clarify the lower limit of loan interest rates for new houses.

The lower limit of the interest rate policy for first home loans remains no less than 20 basis points below the corresponding period's LPR, and the lower limit of the interest rate policy for second home loans is adjusted to no less than 20 basis points above the corresponding period's LPR. That is to say, if the current 5-year LPR is 4.20%, the interest rate for purchasing a first home can be lowered to a maximum of 4.0%; if it is a second home, the loan interest rate is 4.20% plus 20 basis points, which is 4.4%.

3. Different regions implement differentiated policies and autonomously regulate.

Based on the principle of differentiated policies according to local conditions, each region can autonomously determine the minimum down payment ratio and the lower limit of interest rates for first and second homes within its jurisdiction according to the local real estate market situation and regulatory needs.

Regulation in different regions 

Reducing the down payment can effectively lower the threshold for residents' home purchases and stimulate the demand for home purchases from those in urgent need and those undergoing housing reform. In fact, some cities have already significantly loosened their policies in 2022. First, most second-tier cities such as Zhengzhou, as well as some third-tier cities, reduced the down payment ratio for local first homes to 20%. Afterward, most second and third-tier cities followed suit. Currently, there are still many cities with a down payment ratio of 30% or higher for first homes and 40% or higher for second homes.

Although the central government has already made a decision to lower the down payment requirement, it is expected that local governments will also actively follow suit. However, there is still room for autonomous regulation in different regions. The minimum down payment ratio for first-time homebuyers in new first-tier, second-tier, and third-tier cities will remain at 30% or gradually decrease to a minimum of 20%. However, the possibility and extent of a down payment ratio reduction in first-tier cities are relatively low compared to other cities. It may be implemented as a pilot program in non-core areas. (This article was first published on the TMTPost App. Author: Zhao Chenhan)

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