1. What is the background of the Announcement?
Individual housing loan interest rate is part of the loan interest rate system. When reforming and improving the loan prime rate (LPR) formation mechanism, the pricing benchmark for individual housing loans should also be switched from benchmark lending rate to LPR, so as to bring into full play the role of the market. Meanwhile, individual housing loan interest rate also forms a key part of the long-term mechanism for real estate regulation and regionally differentiated housing credit policies. In order to earnestly implement the principle that “housing is for living in, not for speculation”, as well as the long-term management mechanism for the real estate market, ensure a stable and orderly transformation of the pricing benchmark, keep interest rates of individual housing loans basically stable, and safeguard the legitimate rights and interests of both borrowers and lenders, the People’s Bank of China (PBC) released the Announcement to clarify relevant matters on the adjustment of individual housing loan interest rate.
2. Following the reform, how will individual housing loans be priced?
Following the reform, new commercial individual housing loans will be priced by adding a few basis points to the latest LPR of corresponding maturity. LPR will be calculated based on the quotes submitted by quoting banks. For each loan, the number of basis points added will be negotiated by the bank and the borrower based on national and local housing credit policies and the loan risk profile. Once determined, the basis points added will remain unchanged throughout the entire contract period.
3. How would you interpret the corresponding maturities when selecting the pricing benchmark?
The current LPRs are of two maturities, i.e. one year and over five years. Therefore, one-year and over-five-year individual housing loan interest rates have direct corresponding benchmarks, while the interest rate benchmarks of less-than-one-year and one-to-five-year individual housing loans can be determined with a reference to the current two LPRs at the lending banks’ discretion. After the reference benchmark is selected, term spread will be reflected through additional adjustment of basis points.
4. What is interest rate repricing?
Interest rate repricing refers to the process in which lending banks, based on the changes of pricing benchmark, calculate a new loan interest rate in line with the calculation method stipulated in the contract. The Announcement specifies that the repricing period of individual housing loan interest rates, between one year and the contract period, can be decided through bilateral negotiations. Borrowers and lending banks can make the decisions based on their capability to bear and manage interest rate risks. For each interest rate repricing, the pricing benchmark should be adjusted to the latest LPR of corresponding maturity.
5. What are the influences on households?
The Announcement is mainly targeted at interest rates of newly-issued individual housing loans, and the interest rates of outstanding loans will remain the same as stipulated in the original contracts. After the pricing benchmark switch, the interest rates of newly-issued first-time commercial individual housing loans nationwide should not be lower than the LPR of corresponding maturity (The over-five-year LPR is 4.85 percent on August 20), and the interest rate of second-time commercial individual housing loans should not be lower than the LPR of corresponding maturity plus 60 basis points (The over-five-year LPR is 5.45 percent on August 20). The rates are basically equivalent to the current lowest real interest rates of individual housing loans in China. Meanwhile, the PBC branches will guide the provincial-level self-regulatory mechanism for pricing interest rates to timely set the lower limit of basis points added to LPR. Compared with the pre-reform period, the expected interest expenditures of households applying for individual housing loans will basically remain unchanged.
6. When will the policy be implemented?
October 8, 2019 is the date on which the new pricing benchmark will be effective. Prior to that, lending banks should amend their loan contracts, transform and upgrade their system and organize staff training. Meanwhile, they should also publicize and interpret policies to clients via different means, so as to ensure a stable and orderly transfer. Loan contracts signed prior to October 8, 2019, whether the loans are issued or not, shall be executed in accordance with the original terms.
