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China’s banks fear stimulus moves will fail to stem tide of mortgage prepayment

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Chinese commercial banks fear stimulus measures will do little to stem tide of mortgage prepayments, squeezing margins

Chinese commercial banks could see an earnings decline of up to 5 per cent this year if a surge in prepayments persists, according to analystsLowering outstanding mortgage rates may help but is not ‘a panacea’ for reviving property sales, an analyst saysBanking & financeYuke Xiein BeijingPublished: 2:00pm, 17 Sep, 2023Why you can trust SCMP

China’s commercial banks are raising questions about whether the central bank’s recent cut to outstanding mortgage rates will be sufficient to hold back a flood of mortgage prepayments and help protect bank margins.

The People’s Bank of China (PBOC) unveiled new guidance last month requiring commercial banks to lower interest rates on outstanding mortgages for first-home loans. The new rates, which will be effective starting on September 25, aimed at stimulating consumption while also reducing the incentive for households to pay down their mortgages early, which had led to a decline in bank profits.

“Lowering outstanding mortgage rates will help alleviate the interest burden on households,” a spokesperson for the PBOC told local media on Wednesday, adding that the new rules have already led to a decline in prepayments, and will help improve household balance sheets and consumer confidence.

The measure has led at least some homebuyers to reconsider their mortgage prepayments.

Kang Chao, an insurance company employee in Changsha, in southeast China’s Hunan province, told the Post that a new mortgage rate of 4.2 per cent could help his family free up about 1,700 yuan (US$234) each month to cover living expenses.

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