Dim forecast for fixed rates

Experts say these new mortgage products must offer lower interest to succeed

When the People's Bank of China raised the interest rate last month, market watchers said it might spark interest in the new fixed-rate mortgage products being offered by several banks.

But experts said the product had a long way to go before it became popular, pointing out that China's financial and banking markets were still tightly controlled by the central government, and that fixed rates were higher than the bank rate.

'I am sure many homebuyers are looking at the fixed-rate product after the interest rate rise in April,' said Patrick Tang Loi-fu, head of Bank of East Asia's China property lending department. 'But I don't think it will become popular, considering the stability of the mainland's floating rate.'

Homebuyers turned to a fixed- rate mortgage only when they faced the risk of high loan rates, he said. But unlike Hong Kong and western markets, where banks were free to change interest rates to manage the lending risk, most consumer lending rates in the mainland were still managed by the People's Bank of China.

Mr Tang said mainland loan rates had been quite low for a long time and that they did not rise very often.

Last month the People's Bank of China raised its benchmark one-year lending rate by 27 basis points to 5.85 per cent in an attempt to tighten the country's credit policy. Home mortgages rose accordingly.

'Before April's rise, the previous one was in 2004,' Mr Tang said. 'I believe 3 per cent to 5 per cent of mainland home loan borrowers would choose a fixed rate, but I don't think the number would increase significantly.'

Leland Sun Li-hsun, chief executive of Pan Asian Mortgage, said: 'If banks in China set an attractive interest rate for fixed- rate mortgages, then I think they would be extremely popular. Most borrowers in China would prefer a mortgage with the certainty of monthly payments.'

However, all fixed-rate products being offered by banks were higher than the floating rates.

Starting this year, China Everbright Bank, China Merchants Bank, Shanghai Pudong Development Bank and China Construction Bank have all received People's Bank approval to launch fixed rate products.

China Everbright Bank is offering 10-year fixed rate mortgage loans at 6.08 per cent. This compared with the five-year or above floating rate of 6.39 per cent. But the central bank allows mainland banks to give borrowers a 10 per cent discount, effectively making the lending rate 5.75 per cent, which is lower than the fixed-rate product.

The length of the loan repayment period was also a concern, said Andrew Ness, executive director of research, CB Richard Ellis, Asia division.

The loan repayment period for floating rates could be anywhere up to 30 years, but fixed rate loans were from three to 10 years and that made it difficult to attract clients.

Some agents believe fixed rate products would appeal to investors who had several properties on hand.

In such cases, the rate risk would be shared by the house buyers and the banks.