Chinese borrowers deal a blow to banks with early mortgage repayments

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Chinese residential property owners are rushing to prepay their mortgages, putting pressure on commercial banks that were already struggling to identify attractive lending opportunities.

Several state bank managers told the Financial Times that branches in Beijing and Shanghai had seen a 20% increase in mortgage prepayments this year.

Analysts said the managers’ accounts were in line with recently released national lending data. “Prepayment is a desire to reduce leverage, it shows a drop in demand, which is consistent with the macro data we’ve seen,” said Nicholas Zhu, senior credit manager at Moody’s Investors Service.

The push by Chinese borrowers to prepay their mortgages comes amid falling investment returns, economic disruption from Beijing’s zero-Covid policy and a liquidity crunch that has hit the real estate sector. This has led many homeowners to try to reduce interest payments.

The stock of medium and long-term household debt – which consists mainly of mortgages – increased only 2.9% in the first six months of 2022, compared to 5.2% in the second half of 2021 and 7.3% in the same period a year ago, according to data released by the People’s Bank of China.

At the same time, domestic currency bank deposits of Chinese households increased by 10.3 billion Rmb ($1.5 billion) in the first half of 2022, an increase of about 13% compared to the same period. a year earlier and the strongest expansion of all six countries. months since 2013. By contrast, household borrowing grew just 8%, its slowest pace since 2007.

Many people paying mortgages own more than one property, have easy access to cash, and pay higher annual interest rates of 5.5-6% than banks charge for loans on second or third homes .

Bill Chen, an independent consultant in Beijing, took out a 25-year Rmb 1.25 million mortgage in 2020 to buy a second apartment in the Chinese capital. But rental income of Rmb6,500 per month does not cover his monthly mortgage payments of Rmb7,826, three-quarters of which is interest, and with no attractive alternative investment options, Chen decided to pay off the mortgage this summer.

“I prefer predictable returns and saving on interest on my home loans seems to be the only predictable returns [I can get] for now,” he said.

Falling house prices also encouraged Chen to pay off his mortgage so he would be ready to sell the apartment if its value continued to fall. Chinese landlords generally must clear any mortgages before beginning a transfer of ownership.

Yan Yuejin, research director of the E-house China Research and Development Institute, said the prepayment trend reflected growing caution among Chinese consumers as Beijing’s push to rein in debt-ridden property developers hit prices and cut prices. returns from industry-related wealth management products. more than 4 percent.

Tan Yifei, founder of Jince Frontier, a Beijing-based consultancy, said the policy was in line with the government’s broader economic goals. “Household deleveraging could be a good thing for financial stability and is in line with the original intention of policymakers to defuse the risks of housing bubbles,” he said.

China’s household indebtedness, which is measured by comparing debt to GDP, soared to 62% at the end of 2021 from less than 5% in 2000, according to data from the National Institution for Finance and Development. .

A line chart of outstanding Chinese household loans as a % of nominal GDP, showing the stabilization of household indebtedness

But the increase in prepayments will add pressure on China’s commercial banks, which consider mortgages among their highest quality assets, and make it harder for them to meet government lending targets.

“Lenders don’t like prepayments,” Yan said. “If prepayments increase too much, they will not meet the annual lending target set by regulators.”

China Merchants Bank said its retail business, which consists mainly of mortgage and credit card loans, accounted for a lower proportion of new loans in the first half of 2022 and was well below its 60% target. The bank’s net interest margin, a crucial indicator of profitability, narrowed 4 basis points to 2.44% in the first six months.

The Bank of Communications, China’s sixth-largest lender by assets, said on Aug. 1 it would charge a penalty of 1% of loan principal for early repayment of home loans and business loans. The bank, which usually waived such penalties, removed the notice after receiving a flurry of complaints.

The People’s Bank of China has made efforts to shift sentiment and support homebuyers, including cutting the five-year prime lending rate, a benchmark rate for mortgages, by 15 basis points to 4.3 % last week.

But most mortgages issued before 2021 were set at higher fixed interest rates and variable rate ones can only be adjusted once every 12 months. This means that some borrowers are keen to pay off their mortgage this year to try and get a cheaper loan.

“I’m ready to pay off my mortgage and sell the house, then buy a bigger apartment for my family and apply for loans at a lower rate,” said Shanghai-based Bella Jiang. “Cost reduction must be done in advance. I don’t want to let the banks sit back and effortlessly earn interest from me when the economic outlook is already so bad. »

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