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Repaying early may not work out
By Hu Xiaocen |
December 21, 2011, Wednesday
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Print Edition
Print Edition
HOMEBUYERS who may seek to repay their loans in advance at the end of this year to avoid higher interest cost may find that it is not in their interest to do so especially if they already enjoyed a 30 percent rate discount.
For existing mortgagors who signed before this year, the three interest rate increases in 2011 mean higher rates for them from the beginning of 2012. In China, mortgage rates are renewed at the beginning of each year for existing mortgagors.
The option of early payments is actually not a wise choice for homebuyers who already enjoyed the 30 percent rate discount.
"Many customers make early repayments near year-end each year when they have extra cash on hand," said Wang Xihuang, credit officer at the Bank of Communications. "However, it doesn't seem to be the case this year. The main reason is that those who enjoy the rate discounts can enjoy even higher returns from simply leaving the money in deposit accounts."
Banks offered up to a 30 percent discount on mortgage interest rates to homebuyers to bolster the then-struggling housing market amid the global financial crisis.
But the good days ended when housing prices soared beyond most people's ability, which then saw the central government launch tightening policies.
The People's Bank of China subsequently raised mortgage rates three times in 2011, and the benchmark mortgage rate for loans over five years is now 7.05 percent.
But after the new interest rates take effect at the start of 2012, mortgages of more than five years will attract 4.92 percent after taking into account the 30 percent discount. Currently, the five-year term deposit interest rate is 5.5 percent.
So for borrowers who have enjoyed a 30 percent discount, the returns from putting money at banks are higher than the borrowing cost on the mortgage.
"I have no intention to make an early repayment at the moment," said Ni Zhiwei, who benefits from a 30 percent discount. "The money is borrowed at a relatively low rate of 4.92 percent compared with my more juicy investment returns."
But other borrowers may find it economical to repay early.
The second-time homebuyers borrowing at the benchmark rate of 7.05 percent may find it worthwhile to repay their mortgages in advance.
A loan officer from a foreign bank, who asked not to be named, said customers have already started to make early repayments.
The banks welcome mortgagors who repay early because they can then lend the money at a higher rate to new mortgage applicants.
For existing mortgagors who signed before this year, the three interest rate increases in 2011 mean higher rates for them from the beginning of 2012. In China, mortgage rates are renewed at the beginning of each year for existing mortgagors.
The option of early payments is actually not a wise choice for homebuyers who already enjoyed the 30 percent rate discount.
"Many customers make early repayments near year-end each year when they have extra cash on hand," said Wang Xihuang, credit officer at the Bank of Communications. "However, it doesn't seem to be the case this year. The main reason is that those who enjoy the rate discounts can enjoy even higher returns from simply leaving the money in deposit accounts."
Banks offered up to a 30 percent discount on mortgage interest rates to homebuyers to bolster the then-struggling housing market amid the global financial crisis.
But the good days ended when housing prices soared beyond most people's ability, which then saw the central government launch tightening policies.
The People's Bank of China subsequently raised mortgage rates three times in 2011, and the benchmark mortgage rate for loans over five years is now 7.05 percent.
But after the new interest rates take effect at the start of 2012, mortgages of more than five years will attract 4.92 percent after taking into account the 30 percent discount. Currently, the five-year term deposit interest rate is 5.5 percent.
So for borrowers who have enjoyed a 30 percent discount, the returns from putting money at banks are higher than the borrowing cost on the mortgage.
"I have no intention to make an early repayment at the moment," said Ni Zhiwei, who benefits from a 30 percent discount. "The money is borrowed at a relatively low rate of 4.92 percent compared with my more juicy investment returns."
But other borrowers may find it economical to repay early.
The second-time homebuyers borrowing at the benchmark rate of 7.05 percent may find it worthwhile to repay their mortgages in advance.
A loan officer from a foreign bank, who asked not to be named, said customers have already started to make early repayments.
The banks welcome mortgagors who repay early because they can then lend the money at a higher rate to new mortgage applicants.
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