Minimum repayment of 1 yuan principal! Multiple banks take action, the popularity of "interest first, principal later" for mortgages is on the rise

Recently, reporters from Securities Times found that some city banks' customers have applied for the "interest-first, principal-later" loan service, but some bank customers also believe that "interest-first, principal-later" will cause excessive repayment pressure in the later period. Several analysts told reporters that the pressure and risks of repaying the principal after the initial interest payment "relief" period should not be underestimated.

Minimum repayment of 1 yuan principal

Recently, many banks including Ping An Bank, China Construction Bank, and Industrial Bank have successively launched the "interest-first, principal-later" repayment service for mortgages. In summary, the mainstream solution for "interest-first, principal-later" in the market is a period of 24 to 60 months of "interest-only" repayment, where borrowers only need to repay the interest. After the interest payment period, they need to repay the remaining loan amount on a regular basis within the remaining loan term. Some banks have stated that this is to reduce the repayment pressure on mortgage customers, with a minimum monthly repayment of only 1 yuan principal.

Taking Ping An Bank, which introduced this product at the end of May, as an example, the bank's "special repayment methods" for housing mortgages include four categories: "two-stage repayment," "bi-weekly payment," "easy repayment," and "balloon loan." It is understood that a balloon loan refers to borrowers calculating monthly installments based on the agreed total number of periods (fixed at 20 years), repaying the loan principal and interest in installments within the loan term, and repaying the remaining principal in a lump sum in the final installment.

However, reporters from Securities Times learned that the mortgage "interest-first, principal-later" repayment service of some banks has not yet been implemented in some regions. A credit customer manager at a branch of Ping An Bank in Beijing told reporters that the bank currently does not have the "interest-first, principal-later" mortgage business, but other types of "balloon loans" such as mortgage operating loans can be processed in the "interest-first, principal-later" mode.

A China Construction Bank mortgage customer in Beijing also revealed that the CCB mobile banking app shows "the repayment plan adjustment service for this loan is not yet available in the region." A customer manager at a branch of Ping An Bank in Futian, Shenzhen, also stated that the bank has not yet implemented the "balloon loan" business.

In fact, the mortgage repayment model of "interest-first, principal-later" is not new, as banks introduced similar services as early as two years ago.

Securities Times learned from Industrial Bank that at the end of February 2022, the bank launched a product called "Withholding Salary Supply," targeting individual first-hand and second-hand housing loan customers with a maximum term of only 3 years, during which the repayment of the loan principal is suspended, and only the loan interest is repaid, as a way to reduce short-term repayment pressure.

China Construction Bank has also introduced a similar product called "Easy Supply" in multiple branches since 2022. This product divides personal housing loans into two stages within the loan term: in the first stage, repay 1 yuan of principal monthly along with the loan interest due for that month (the first stage term can be determined by the borrower's needs, up to a maximum of three years); in the second stage, within the remaining loan term, the remaining loan principal can be repaid in equal principal or equal installment payments.

Suitable for those expecting future income improvement

"When I saw the promotion of 'interest-first, principal-later,' I was also tempted," Mr. Li told Securities Times. He still has around 2 million yuan in mortgage loans, and the bank where he borrowed from has not yet introduced such a service However, Mr. Li also has concerns: "Just thinking about the pressure of the principal later on, I still prefer to repay the mortgage first." On social media, there are quite a few people like Mr. Li who are hesitant about the "interest-first, principal-later" mortgage.

A reporter from Securities Times calculated an example using ICBC's "Easy Supply" product. Assuming a loan of 1 million RMB, a repayment period of 30 years, and an interest rate of 3.5%. With the conventional equal principal and interest repayment method, the monthly payment would be 4490 RMB. If this product was used two years ago, then only 1 RMB of principal would need to be repaid each month, with a monthly payment of around 2800 RMB. However, due to the delayed repayment of the principal after using this product, the final interest generated is nearly 60,000 RMB higher than that of equal principal and interest.

Several analysts told Securities Times that after the initial "pressure relief" period of interest payment, the pressure and risks of repaying the principal cannot be ignored. Regardless of how the repayment is made later on, the pressure of repaying the principal will increase. If the calculation of income and repayment ability is not accurate, it is easy to generate default risks.

Li Yujia, Chief Researcher of the Housing Policy Research Center of the Guangdong Provincial Urban Planning Institute, told Securities Times that such products are targeted at young people, new urban residents, and other homebuyers who have concerns about repayment. In the current situation of limited demand for loans, the design of "interest-first, principal-later" can to some extent alleviate the pressure and concerns of homebuyers.

Li Yujia analyzed that currently, residents' willingness to apply for mortgage loans is not strong, but banks, facing an asset shortage, still regard mortgage loans as high-quality assets to compete for, leading to intensified competition among banks. Between banks, apart from competing on loan interest rates, there is more competition in services. Furthermore, with limited room for banks to lower interest rates and compete for customers, expanding customer base through loan product design and innovation has become an option.

Wang Pengbo, a senior analyst at Bocom Financial Consulting, believes that with the introduction of policies encouraging real estate, banks are seizing the opportunity to launch corresponding products, which can stabilize existing users and attract new users, which is the main motivation. Currently, banks are under pressure on the asset side, while real estate remains one of the high-quality assets and exports. The "interest-first, principal-later" product can also prompt banks to exert efforts in industry competition.

Yan Yuejin, Research Director of E-House Research Institute, told Securities Times: "Generally, families whose income situation is expected to continuously improve over the next five years can try this type of service. However, assuming that the ability to repay in the future will increase easily, or misjudging the income situation, can easily lead to new pressures and risks." However, Yan Yuejin also believes that for commercial banks, large-scale promotion of this model will also bring risks. He suggests that for customers with a demand to alleviate some stage payment pressure, commercial banks can implement individual assessments before implementation.

Calls for Adjustment of Existing Mortgage Loans Resurface

After the recent real estate policies, various regions have successively abolished the lower limit of mortgage interest rates, and new housing loan rates have hit new lows. According to some institutions, the average first-home mortgage rate in 30 sample cities has dropped by 20 basis points recently, with the city with the largest decrease reaching 45 basis points, and the lowest rate dropping to 3.15%.

Relatively speaking, customers who purchased homes earlier still maintain mortgage rates of over 4%. In the fourth quarter of 2023, data disclosed by the central bank showed that 23 trillion RMB of existing mortgage loans had their rates lowered (accounting for approximately 60% of the total mortgage size), with the adjusted weighted average rate at 4.27% Compared with the new mortgage interest rates, the interest rate spread between the two has widened again.

Against this backdrop, some bank customers have chosen to repay existing housing loans in advance. Mr. Wu, who lives in Shanghai, told Securities China reporters that in May this year, he once again applied to the bank to repay his mortgage in advance by 130,000 yuan. This was the 5th time he had made early repayments within 8 months, totaling 1.4 million yuan in advance repayments, depleting his previous savings and half a year's income. Mr. Wu stated that his company is currently undergoing layoffs, and the early repayment is mainly due to concerns about unstable future income, in order to proactively reduce debt.

According to a research report recently released by the Guotai Junan Securities team led by Han Zhaohui, since February, the early repayment rate index for residents has accelerated, reaching a historical high of 37% in April, which is at a historically high level, reflecting a significant increase in residents' early repayment behavior.

The Han Zhaohui team's analysis believes that this round of early repayment trend is driven by a shortage of high-yield assets (lower deposit rates, guidance on long-term government bonds, suspension of large-denomination certificates of deposit, manual interest rate adjustments), and the key to reversing this trend is to change residents' expectations of asset shortages, fundamentally by stabilizing prices and raising inflation expectations.

Recently, some experts have called for another reduction in the interest rates of "existing housing loans". Zhang Dawei, Chief Analyst of Zhongyuan Real Estate, recently called for a further reduction in the interest rates of existing housing loans. He believes that the adjustment of existing housing loan rates is a complex issue involving various interests and market expectations. What the current real estate market lacks most is "confidence". Stabilizing the real estate market to rescue the economy, and the most important aspect of economic recovery is to drive consumption. If the interest rates of existing housing loans are lowered again, ordinary people will have more money to spend each month.

However, many experts believe that in the short term, commercial banks lack the motivation to continue lowering the interest rates of existing housing loans. Li Yujia told Securities China reporters that the cost of bank liabilities is very high, loan interest rates are continuously declining, bank income faces significant challenges, so there is not much room for a short-term decline in loan interest rates.

The research report by the analyst team led by Ma Xiangyun from Changjiang Securities predicts that the probability of another adjustment to the interest rates of existing housing loans in the short term is low. During this round in 2023, the interest rates of existing housing loans were relatively high, close to 5%. At that time, when the policy was adjusted, it was mentioned that part of the reduction was the historical excess points of banks. Therefore, if there is another reduction, it means breaking through historical policies. Recently, banks' net interest margins hit a new historical low, causing a decline in revenue and profits. Banks are facing operational pressures, so they will be more cautious in implementing policies that have a greater impact.

Authors: Huang Yulin, Xie Zhongxiang, Source: Securities China, Original Title: "Minimum Principal Repayment of 1 Yuan! Several Banks Take Action, Heating Up the Trend of 'Interest First, Principal Later' for Mortgages"