Significant interest rate cuts, but does it not affect your mortgage rate?#
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This article is from WeChat Official Account: 三折人生 (ID: Ezhers), Author: 三折人生，Cover image from: Visual China
On February 20, 2024, the People's Bank of China authorized the National Interbank Funding Center to announce the latest LPR quotation, which is 3.45% for a one-year term and 3.95% for a term of five years or more.
But this time, one rate decreased while the other remained unchanged, which we call asymmetric decrease.
Among them, the one-year LPR remained unchanged, while the LPR for terms of five years or more, which is closely related to housing loans, decreased by 0.25%.
Don't worry, to clarify this issue, we need to understand what LPR is.
We have mentioned the history of LPR in previous articles, and today we will briefly explain the key points.
LPR is known as the loan market quoted interest rate, and the current LPR pricing mechanism adopts the method of "adding points" to the open market operation interest rate.
Therefore, LPR is usually linked to the open market operation interest rate.
So what is the open market operation interest rate?
Here, the open market operation interest rate mainly refers to the MLF rate.
MLF stands for Medium-term Lending Facility, which can be simply understood as the interest rate at which the central bank provides loans to banks that meet certain conditions.
According to pronunciation, MLF is also jokingly referred to as spicy hot pot.
MLF rate is a policy rate determined by the central bank.
Now let's talk about the general process:
Unlike MLF, LPR is not directly announced by the central bank, but is calculated based on the quotations of 20 quoting banks.
These 20 banks include representative national banks, city commercial banks, rural commercial banks, foreign banks, and private banks, all of which are selected through assessments.
First, the 20 quoting banks determine the initial price of LPR based on the MLF rate plus a certain spread.
The spread of each quoting bank mainly depends on its own funding cost, market supply and demand, risk premium, and other factors.
Then, the highest and lowest prices among the quoted LPR initial prices are excluded.
Finally, the arithmetic average of the above quotations can be obtained as the LPR.
LPR is announced once a month, at 9:15 on the 20th of each month.
The LPR interest rate may rise or fall every month.
As you can see, the People's Bank of China adjusts the MLF rate, which in turn affects the LPR and can influence the level of interest rates in the market.
This time is a bit special. Although the MLF rate has not been lowered recently, the LPR for terms of five years or more has decreased, which is the largest single decrease in history!
Since the LPR has been adjusted, let's go back to the question at the beginning:
The interest rate of newly issued commercial personal housing loans by banks is based on the LPR of the corresponding term in the most recent month plus a spread.
Simply put, if you choose a floating interest rate, then your mortgage rate will indeed be linked to the LPR for terms of five years or more.
However, it does not change immediately.
The adjustment of your mortgage rate may not be as you imagine, as there are requirements.
When customers apply for a loan, they need to negotiate and agree with the bank on the period for repricing the interest rate.
The shortest repricing period is one year, and during this time, the loan rate can only be adjusted once a year.
The adjustment date is usually set on January 1st of each year or the effective date of the loan contract.
On the repricing day, your loan rate will be adjusted to the LPR rate of the corresponding term in the most recent month plus n%.
If you choose the adjustment date as January 1st, the corresponding most recent LPR should be the one announced on December 20th of the previous year.
However, the LPR for terms of five years or more announced on December 20th of the previous year did not decrease.
So the decrease in LPR in February does not affect your mortgage rate this year.
Don't worry, there will be opportunities next year.
Of course, if your repricing date is set on another day, then wait until that day to see the LPR situation.
But for those who are planning to buy a house, this is a big advantage!
The transmission channels of loan policies may undergo significant changes, and the relationship between LPR and MLF rates will be further diluted in the future.
The 20 quoting banks will adjust their quotations based on their own funding costs, market supply and demand, risk premiums, and other factors. LPR will become the main reference benchmark for loan rate pricing.
This article is from WeChat Official Account: 三折人生 (ID: Ezhers), Author: 三折人生