China banks have been told to cut rates by about 50 bps on existing mortgage loans

China's central bank announced on Sunday that it would instruct banks to lower mortgage rates on existing home loans by Oct. 31, as part of broader measures to support the struggling property market amid an economic slowdown. According to a statement from the People's Bank of China (PBOC), commercial banks are expected to cut interest rates on existing mortgages in phases, by at least 30 basis points (bps) below the Loan Prime Rate (LPR), the central bank’s reference rate for mortgages. The average rate cut is anticipated to be around 50 bps.

This move follows a series of policies aimed at revitalizing China's property market, including reductions in down-payment ratios and mortgage rates. However, these stimulus efforts have had limited success in boosting sales or increasing liquidity in a market that has seen little interest from buyers, further weighing down overall economic growth.

On Sunday, the city of Guangzhou lifted all restrictions on home purchases, while Shanghai and Shenzhen announced plans to ease restrictions on housing for non-local buyers and lower the minimum downpayment for first-time buyers to as low as 15%. These actions come shortly after China introduced its most significant stimulus package since the COVID-19 pandemic to combat deflation and revive the economy.

'Urgent Adjustments' to Stimulate Sales

Recent data indicated that new home prices in August fell at their fastest pace in over nine years, with property sales dropping 18% during the first eight months of the year. The PBOC's rate cuts aim to reduce the financial burden on homeowners, in hopes of stimulating the property market and addressing weak consumer demand.

"As market-oriented reforms on interest rates deepen and the real estate market undergoes significant changes, the current mortgage rate pricing mechanism has revealed some flaws," the PBOC noted in its statement. "Public response has been strong, and the mechanism urgently needs adjustment and optimization."

China's four largest state-owned banks, including Industrial and Commercial Bank of China and China Construction Bank, expressed support for the policy and are actively working on adjusting existing mortgage rates.

While previous mortgage rate reductions primarily benefited new homebuyers, existing homeowners with higher-rate loans have been left with higher payments. As a result, many households have rushed to pay off mortgages early, which has further dampened consumer spending.

As of the end of June, the total value of outstanding individual mortgages stood at 37.79 billion yuan ($5.39 billion), a 2.1% year-on-year decline, according to official data. In addition, the PBOC announced it would extend supportive measures for developers' real estate loans and trust loans until the end of 2026 to better meet developers' financing needs.