On December 31, Caixin reported (by journalist Cao Yunyi) that looking back at 2024, the LPR (Loan Prime Rate) experienced three significant declines with the 1-year LPR down a total of 35 basis points and the 5-year LPR down a total of 60 basis points, both reaching new annual lows since the LPR reform.

Taking the mortgage rates in the CNI Yangtze Index region as an example, the interest rate for first-home loans in Shanghai was 4.15% at the beginning of the year and is now at 3.15%. In regions like Hangzhou, Nanjing, and Wuxi, rates have also dropped from a high of 4% to the '2 era' lows. However, as the year comes to an end, many areas in the CNI Yangtze Index have raised the minimum interest rates for first-home loans against the trend. What fluctuations will the mortgage rates experience in 2025?

Industry insiders told Caixin that in the short term, mortgage rates will stabilize at low levels. There is a possibility that in 2025, a significant guidance of the 5-year LPR quotes downward may continue to implement targeted interest rate cuts for residents' home loans. This will be a key move to stabilize the declining real estate market.

At the same time, after the repricing in early 2025, the interest rate on existing first-home loans will decrease by a total of 110 basis points to 3.3%, reducing monthly payments to 4380 yuan. For every 1 million yuan in loans, this will result in a monthly reduction of 627 yuan, with total interest decreasing by 0.226 million yuan. From a consumer perspective, the released funds from the lowered existing mortgage rates will significantly boost consumer spending.

However, since 2024, the multiple reductions in LPR, combined with the lowering of interest rates on existing housing loans, have significantly dragged down the yield on the banks' asset side. In 2025, facing insufficient retail demand and a background of loose monetary policy, banks will still face considerable downward pressure on interest margins.

The interest rate for first-home loans has decreased three times this year, leading to a decline in the trend of early repayments.

In December, the last LPR was announced, with the 1-year LPR at 3.1% and the 5-year LPR at 3.6%, both maintaining the previous values. Reflecting on 2024, there have been three significant reductions in the 'anchor' of the mortgage rate, with the 1-year LPR down a total of 35 basis points and the 5-year LPR down a total of 60 basis points, both reaching new annual lows since the LPR reform.

In February, the LPR for over 5 years was reduced by 25 basis points, with the drop being larger than market expectations. In July, both the 1-year and 5-year LPRs were lowered by 10 basis points. In October, the 1-year and 5-year LPRs were reduced by 25 basis points, the largest decrease since the LPR reform in 2019.

As a result, the interest rates for first-time home loans in various regions have sharply declined. This year, in Shanghai, the first-time home loan interest rate dropped from 4.15% to 3.15%, while the second home loan rate fell from 4.55% to 3.55%. Compared to the first-time home loan rate of 4.0% at the beginning of the year, the latest LPR adjustments in October brought down home loan rates in the CNI Yangtze Index regions like Hangzhou, Nanjing, and Wuxi to the '2 era'.

However, as year-end approaches, several regions in the CNI Yangtze Index have increased the lower limit of the first-time home loan interest rates against the trend. Starting from November 30, the individual housing loan interest rate in Zhejiang Province has been raised to no less than 3.1%. For example, in Hangzhou, the first-time home loan rate was increased from 2.9% to 3.0% in November and further raised to 3.1% in December, a total increase of 20 basis points. Previously, the first and second home loan rates in Nanjing had both dropped to 3.05%, and after the latest loan market quote was released on October 21, the first-time home loan commercial rate was updated to LPR minus 65 basis points, which is 2.95%, but this rate only lasted for a short time.

"The costs and returns of mortgage lending need to be balanced; this is the current mainstream mentality in the banking industry," said Yan Yujin, deputy director of the Shanghai E-House Real Estate Research Institute. With the pressure on interest margins, banks are eager to improve the yields on interest-earning assets, which is one reason why some banks have raised the lower limit of home loan interest rates.

"Raising the lower limit of home loan interest rates can also prevent an expectation of disorderly rate declines in the market," added Li Yujia, chief researcher at Guangdong Housing Policy Research Center. "Since last year, home loan rates have declined rapidly and significantly, leading to a form of inward competition in the banking industry where banks compete for customers through 'price wars', contributing to an expectation that interest rates will continue to fall, thus resulting in some customers delaying purchases in anticipation of further rate cuts."

Another noteworthy phenomenon is that, under the backdrop of LPR cuts and frequent favorable policies, the momentum for early repayments has effectively been restrained. On October 25, commercial banks unified the adjustment of national stock mortgage rates. Data shows that personal housing loans have continued to present negative growth under the impact of early repayments for six consecutive quarters, which has dragged down the growth of household loans, slowing each quarter since 2023, with the growth rate further declining to 3.1% in the third quarter of this year.

According to calculations, with the stock mortgage rate lowering from 4.4% to 3.55%, a decrease of 85 basis points, on a loan of 1 million over 30 years on an equal principal and interest repayment plan, the monthly payment drops from 5007.6 yuan to 4518.4 yuan, a monthly decrease of 489.21 yuan; the total interest over 30 years decreases from 0.8027 million yuan to 0.626 million yuan, a reduction of 0.1767 million yuan.

After the repricing at the beginning of 2025, the stock first-time home loan interest rate will decrease a total of 110 basis points to 3.3%, with monthly payments dropping to 4380 yuan. For every 1 million yuan loan calculated at a decrease of 110 basis points, the monthly payment will decrease by 627 yuan, and the total interest will reduce by 0.226 million yuan.

“It is important to properly implement a phased reduction of the interest rates on existing housing loans after the LPR repricing in 2025. Lowering the interest rates on existing housing loans, as part of disposable income, has a substantial driving force for boosting consumption.” MINSHENG BANK's chief economist Wen Bin pointed out that, from a consumption perspective, the release of funds from existing housing loan interest rates has a significant impact on consumption.

In 2025, there is still room for reduction in housing loan interest rates, and the interest margin pressure on joint-stock banks is considerable.

Looking ahead to the policy interest rates in 2025, the industry believes there is still downward space, and LPR Quotes will follow with adjustments, which also means that housing loan interest rates are expected to continue declining. However, this will significantly drag on the yield of banks' asset sides, and in 2025, faced with insufficient retail demand and a background of loose monetary policies, interest margin pressure will remain substantial.

Wang Qing, the chief macro Analyst of Dongfang Jincheng, told the reporter from Caixin that, "There is still room for policy interest rates to be lowered in 2025, and the LPR quote will also follow with adjustments. This will lead to a reduction in various market interest rates including housing loan rates, and in the future, there will be room for reduction in provident fund loan interest rates as well. This suggests that the recent rise in the lower limit of housing loan rates in some cities may be a temporary and individual phenomenon."

In Li Yujia's view, it is necessary to consolidate the stabilization of the real estate market while ensuring banks' profits. Housing loan interest rates should operate within a relatively narrow range. The future trend of housing loan interest rates mainly depends on the adjustment of policy interest rates, such as LPR, deposit rates, and open operation rates. "Thus, in the short term, housing loan interest rates will stabilize at low levels, correcting the distorted price competition. If the foundation for stabilization is not solid, policy interest rates will be lowered next year, which will directly drive down housing loan interest rates. In the medium to long term, both from the standpoint of economic fundamentals and real estate fundamentals, there is no support for a rebound in housing loan interest rates."

Wang Qing believes that it is possible to continue implementing a significant and targeted interest rate reduction for residents' housing loans in 2025 by substantially guiding the LPR quotes for five years and above downwards. This is a key move to promote the stabilization of the real estate market.

However, this year, the next LPR reduction combined with adjustments in bond yields and other factors has already put considerable pressure on the net interest margins in the banking sector. Facing insufficient retail demand and a backdrop of loose monetary policies next year, the pressure on bank interest margins will not lessen, especially noticeable in joint-stock banks.

Data shows that in the first half of 2024, individual housing loans from joint-stock banks decreased by 0.3% compared to the beginning of the year, while the default rates of individual housing loans from different types of banks also rapidly increased, with the default rate of individual housing loans from joint-stock banks slightly higher than that of state-owned banks, showing that, from an absolute level, the overall default rate is still within a safe range.

Since the beginning of 2024, the LPR has been repeatedly lowered, along with the reduction in existing mortgage interest rates, which has significantly dragged down the yield on the asset side of the Banks. In 2025, faced with insufficient Retail Trade demand and a background of loose monetary policy, it is expected that the interest margin of joint-stock Banks will still face considerable downward pressure," said an Analyst from Fitch Bohua to the Financial Associated Press.

The aforementioned Analyst from Fitch Bohua stated that in the face of the continuous downturn in the Real Estate market, the willingness of residents to purchase homes has significantly weakened. Coupled with the slowdown in economic growth, Consumer demand is relatively weak, and the growth rate of commercial Banks' Retail Trade business continues to decline. At the same time, in the context of narrowing interest margins, various Banks are strengthening their expansion efforts in Retail and inclusive micro-business sectors, and joint-stock Banks are also beginning to face intensified competitive pressure. "In 2025, in a loose monetary and credit environment, as well as under multiple regulatory optimization measures in the Real Estate Industry, the industry's risk exposure will tend to ease. However, there may be a certain degree of relaxation in the identification standards for risk classification, which could accumulate some credit risk that will require a longer time period to digest potential risks. The non-performing loan ratio for personal housing loans at joint-stock Banks has continued to rise in recent years, but the absolute level remains relatively low, and it is expected to remain within a safe range in the medium to short term."