Analysis: China’s mortgage rate cuts spur prepayment rush, threaten bank earnings

Analysts estimate that nearly $700 billion of mortgages – close to one-eighth China’s outstanding total – have been prepaid since early last year, when banks started to lower borrowing rates.

Mortgage holders, feeling unduly burdened by the higher rates they took on in years past, are tapping their personal savings or taking out cheap loans under stimulus programs intended for big-ticket consumer purchases or for starting new businesses.

This threatens banks’ profits on mortgages, which accounted for about 30% of outstanding loans at China’s five biggest banks as of last June, according to their latest financial reports.

It also highlights, however, how mortgage rate cuts and other measures to aid China’s faltering property sector, hit by a slump in demand and a cash crunch at major developers, have yet to deliver a meaningful recovery, even as recent data show the market is stabilising. Analysts expect a recovery will only kick in towards the second half of this year.

“From the banks’ point of view, early mortgage repayment means funds are paid back to banks, and could help fund new mortgage loans, but the issue is poor buying sentiment,” said Yan Yuejin, an analyst at E-house China Research and Development Institution, a Shanghai-based property services company.

The current disinterest in new home purchases contrasts sharply with the overheated property market of prior years, when authorities kept mortgage rates high to cool speculation.

About 17.7 trillion yuan ($2.6 trillion) of mortgages, nearly half the current outstanding total, were granted between the fourth quarter of 2017 and the first quarter in 2022 at relatively high rates of 5.26% to 5.72%, said Judy Zhang, a banking analyst at Citigroup.

Towards the middle of last year, however, regulators began lowering benchmark mortgage rates to prop up property demand, after a liquidity crisis among developers sent home prices and sales into a downward spiral.

According to a survey by Chinese mortgage data provider Rong360 in January, the average mortgage rate for first-time home buyers in December was 4.16%, down 137 basis points from a year earlier and the lowest since the survey began in 2015.

Property slump

Disgruntled homeowners saddled with the older, higher rates responded by paying off their mortgages early: Citigroup’s Zhang estimates that prepaid mortgages totalled 4.68 trillion yuan last year, compared with China’s total outstanding mortgages of 38.8 trillion yuan at end-2022, according to central bank data.

Zhang wrote in a recent note that heavy prepayments could persist for higher-rate mortgages, knocking up to 5% off Chinese banks’ earnings this year in a worst-case scenario.

A shipping employee in Shanghai who gave only his surname Wang said he saved at least 200,000 yuan last month by taking out a lower-rate consumer goods loan to pay down his original mortgage on an apartment in the nearby city of Suzhou.

“I decided to do so because I’m burdened with a mortgage rate that’s too high,” Wang said. He declined to give his full name due to the sensitivity of the matter.

Some banks have tried to stem the tide of prepayments by adding red tape and slowing the processing of applications, forcing some borrowers to wait for months for approvals, local media have reported.

A banker at the Beijing branch of a commercial bank said about 20% of existing clients had applied to prepay mortgages and his bank had stretched the approval process to about half a year.

“Banks are trying to stall for time,” the banker said. He declined to be named as he was not authorised to speak to the media.

The rush of prepayments has continued into this year, with the dull outlook for returns on investments such as stocks and bonds also encouraging cash-rich borrowers to pay off debts, said Nicholas Zhu, a banking analyst at Moody’s.

He expected this deleveraging to undermine confidence in the property market, which has already been badly shaken by the liquidity crisis and slumping sales.

The authorities have signalled concern over the rise of prepayments, and last week China’s central bank and top banking regulator met with lenders to discuss ways to address the issue, the state-backed China Banking and Insurance News reported.

The regulators said they would step up investigations and penalties for the misuse of business and consumer loans, according to the report.

Nevertheless, the authorities are likely keen to avoid further angering homebuyers, who created a stir last year with protests over heavily indebted developers that failed to complete projects on time.

The regulators said banks should not impose restrictions on qualified homeowners looking to prepay their home loans and should protect the legitimate interests of bank customers, the report said.