Recently, there has been a renewed call for a reduction in the interest rates for existing housing loans.

Since last Friday, the adjustment of interest rates for existing housing loans and related policies have been attracting widespread attention from various sectors of society. Recently, industry experts have further discussed the extent and pace of the reduction in interest rates for existing housing loans.

However, under the continuous pressure of narrowing interest rate spreads in the banking industry, how to alleviate the burden on households while mitigating the squeeze on bank profits has also become a key concern in the industry. Data shows that the net interest margin of domestic commercial banks in the first half of this year was 1.54%, significantly lower than the regulatory standard of 1.8%. At the same time, as of the end of June, the balance of personal housing loans in China was 37.79 trillion yuan.

In the view of industry experts, a significant reduction in interest rates for existing housing loans will undoubtedly reduce the interest income of banks, further compressing the net interest margin. However, it can also reduce the motivation for early repayment by residents, which is helpful in stabilizing the size of bank loans. It is recommended to adjust the interest rates in stages to mitigate the impact on net interest margin, while controlling bank liability costs through measures such as lowering deposit rates to offset the related effects.

"It is expected that there may be more policies to support real estate and stimulate domestic demand in the future, but the pressure on interest rate spreads in banks is also a matter of concern. It is expected that the market-oriented interest rate reform will continue to be promoted, especially the linkage between deposit and loan interest rates," experts said.

In July, there was a difference of about 80 basis points between the interest rates for existing and new housing loans, prompting calls for adjustments in the interest rates for existing housing loans.

"The interest rate for my current housing loan is much higher than the current interest rate for new housing loans. Recently, I will use the idle deposits on hand to repay my housing loan in advance," said Mr. Zhang, a resident of Beijing, to Caixin reporters. Although the housing loan interest rate has been lowered with the LPR, it is still as high as 4.85%, which is significantly higher than the current interest rate for new housing loans, causing him a lot of distress.

In fact, with the successive introduction of policies to reduce mortgage interest rates in various places, there are not a few people like Mr. Zhang who are facing the above situation. Residents in various places have also started a wave of early repayments, hoping to save some of the mortgage costs through early repayment.

At the same time, there is a growing call in the market for adjusting the interest rates of existing housing loans. "If my mortgage interest rate can be aligned with the latest mortgage interest rate, the need for early repayment may not be so great, and the burden of the mortgage will also be reduced," Mr. Zhang said.

Caixin journalist noticed that since last Friday, the market's discussion and speculation about the reduction of interest rates on existing housing loans and the conversion to mortgages have intensified, and even further analysis and assumptions have been made about the specific extent and pace of the reduction.

According to Guosheng Financial's calculation, the interest rate for new individual housing loans in July is 3.4%, with a difference of about 80 basis points between the interest rates for existing housing loans and new loans. However, due to the total reduction of the five-year LPR by 35 basis points in February and July 2024, the actual interest rate difference between existing housing loans and new loans may be less than 45 basis points after the repricing is completed. Therefore, if it is assumed that the interest rate for existing housing loans is reduced again, the actual reduction may be less than 45 basis points.

"If the interest rate on existing housing loans is reduced by 80 basis points to match the interest rate on new loans, calculating based on a mortgage loan of 1 million yuan with a principal period of 30 years and equal principal and interest, the monthly payment can be reduced by about 480 yuan." In the view of Yan Yuejin, deputy dean of the E-House China R&D Institute, if this adjustment exceeds the magnitude of the previous round of reductions in interest rates on existing housing loans, it can have a very good effect in reducing the burden and stabilizing the real estate market. At the same time, a significant adjustment to the interest rate of existing housing loans may further alleviate the phenomenon of residents repaying their loans in advance.

In response to this, several borrowers of existing housing loans also told Caixin journalists that they hope the interest rate on existing housing loans can be reduced to the level of new housing loans. "For me personally, if I still have 20 years of mortgage left, the overall savings after the adjustment would be around 0.11 million yuan, which is quite significant for ordinary families," said Mr. Wang, a resident who bought a house in Hangzhou.

Experts suggest gradually reducing the interest rate on existing mortgages in stages to offset the pressure of the spread between the cost of debt and the interest rate differential.

"This is a feedback from the bottom up." In the view of Zheng Jiawei, chief fixed income analyst at Yongxing Securities, the interest rate for new mortgage loans has significantly decreased, while the spread between the interest rate for existing mortgage loans and new mortgage loans has gradually widened, leading to an increasingly high demand from residents for reducing the interest rate for existing mortgage loans to alleviate their economic burden.

In this regard, Citic Securities' chief economist, Ming Ming, frankly stated that there is a possibility that China may consider lowering the interest rate of existing housing loans. He pointed out that if the adjustment of existing loans is implemented, the decrease in loan interest rates will reduce banks' interest income, and the net interest margin of banks may be compressed. However, on the other hand, the decrease in loan costs will reduce residents' motivation for early repayment and also contribute to stabilizing banks' loan scale.

"There is a possibility of subsequent interest rate reduction for existing mortgage loans, but not necessarily allowing conversion to new mortgage loans, and it is more likely to reduce the interest rate spread for existing mortgage loans." In the view of Liang Fengjie, chief analyst of Bank at Zheshang Securities, the current demand to lower mortgage interest rates from residents is high, and residents' interest burden is still heavy, so there is a possibility of interest rate reduction for existing mortgage loans. However, the conversion to new mortgage loans involves cross-bank cooperation and other complex procedures, and it may cause intense competition among banks if it is liberalized under the current weak demand for mortgages.

However, considering the significant pressure on the interest rate spread of commercial banks, regulators have stated the need to maintain a reasonable level of profitability and net interest margin for commercial banks. Liang Fengjie believes that if the interest rate for existing mortgage loans is reduced, it is expected that there will be a high probability of accompanying reduction in deposit costs to offset the pressure on banks' interest rate spreads.

Regarding how to alleviate the pressure on households' burden while easing the squeeze on bank profits, Ming Ming believes that, on the one hand, interest rates can be gradually adjusted in stages to avoid a one-time large-scale interest rate reduction that would have a significant impact on banks. On the other hand, the cost of bank liabilities can be controlled by reducing deposit rates and other means to balance the bank's income. At the same time, banks are encouraged to improve service quality and innovative financial products to increase non-interest income and reduce reliance on interest income.

At the same time, Zheng Jiawei also pointed out that in the long run, the overall interest rate spread and profits of banks will be compressed. However, in the short term, lowering the interest rate of existing mortgage loans in two steps can have a certain buffering effect and reduce the impact on banks. Furthermore, further reduction in deposit rates can also offset the related impact. In terms of stock price trends, the effect on the fundamentals of banks is relatively neutral.

Looking ahead, Ming Ming believes that future adjustments in related aspects may continue to develop towards supporting the stability of the real estate market and stimulating domestic demand. It is expected that there may be more policies introduced in the future to promote the healthy development of the real estate market while ensuring the stability of the financial system. However, he also pointed out that the pressure on the interest rate spread of banks must be taken seriously, and it is expected that market-oriented interest rate reforms will continue to be promoted, especially the linkage between deposit and loan interest rates will be strengthened.