Which housing loan interest rate is better? The difference between fixed and floating interest rates in 2020

When converting the pricing of existing mortgage loans, home buyers face two choices: first, choose a fixed interest rate. In other words, the mortgage interest rate will remain unchanged at the current interest rate level, and no matter how the LPR interest rate changes in the future, the mortgage interest rate for home buyers will remain unchanged. Second, choose a floating interest rate. This means that mortgage interest rates will change according to changes in LPR.

The People's Bank of China recently announced that it will convert the pricing benchmark for existing floating-rate loans from March to August 2020. Among them, the mortgage interest rate is closely related to everyone's wallet.
The most critical change in the announcement is that the previous loan benchmark interest rate for home loans will be converted into the Loan Market Reference Rate (LPR). In the past, when talking about mortgage interest rates, people generally said "how much the benchmark interest rate will be discounted or increased"; after the reform, when talking about mortgage interest rates, they would say "how much the LPR interest rate will go down or up".
In fact, since October 8, 2019, newly issued personal housing loans have been priced based on the LPR of the corresponding period in the most recent month. In other words, newly issued personal housing loans are formed by adding a certain percentage to the 5-year LPR interest rate.
After the pricing conversion of new personal housing loans is completed, the interest rates of existing housing loans will also be converted starting from March 2020. What impact will this change have on individuals who have already taken out loans to buy homes?
The first thing to be clear is that the object of this loan pricing conversion is existing commercial personal housing loans, and does not include provident fund personal housing loans.
What home buyers are more concerned about is whether the mortgage interest rate will be higher or lower after the conversion? "Mortgage rates will remain stable," said Chen Ji, senior researcher at the Financial Research Center of the Bank of Communications. The central bank stipulates that the interest rate level remains unchanged at the time of conversion, that is, after the conversion of existing mortgage interest rates in 2020, it will remain the same as before.

For example, if the previous mortgage interest rate was 10% higher than the benchmark interest rate, and the benchmark interest rate was previously 4.9%, after an increase of 10%, the mortgage interest rate would be 5.39%. So, after the conversion begins in March 2020, home buyers' mortgage interest rate in 2020 will remain at 5.39%, only the calculation formula has changed. The new mortgage interest rate will be a certain increase or decrease from the LPR.
When converting the pricing of existing mortgage loans, home buyers face two choices: first, choose a fixed interest rate. In other words, the mortgage interest rate will remain unchanged at the current interest rate level, and no matter how the LPR interest rate changes in the future, the mortgage interest rate for home buyers will remain unchanged. For example, the previous mortgage interest rate was 10% higher than the benchmark interest rate. After choosing a fixed interest rate, the home buyer's mortgage interest rate will remain unchanged at 5.39% before maturity.

Second, choose a floating interest rate. This means that mortgage interest rates will change according to changes in LPR. Assuming that the repricing cycle is 1 year, the previous mortgage interest rate was 10% higher than the benchmark interest rate. In December 2019, the LPR for terms of more than 5 years was 4.8%. Then, the increase should be 0.59 percentage points (5.39%-4.8%=0.59%). In 2020, housing loan levels remain unchanged. Starting from 2021, the mortgage interest rate for home buyers will be the 5-year LPR on December 31, 2020 + 0.59%, and the same will apply every year thereafter.
Some people also asked, if you buy a house early and the mortgage is discounted at that time, how should it be calculated? Assuming that the previous mortgage rate was 30% off the benchmark interest rate, the mortgage interest rate would be 3.43%. In 2020, the mortgage interest rate for home buyers will still be 3.43%, and the markup should be negative 1.37 percentage points (3.43%-4.8%=-1.37%). In other words, the mortgage interest rate calculation formula in the future will become LPR-1.37%.
Two methods, how to choose? Wen Bin, chief researcher at China Minsheng Bank, believes that although banks will provide both floating and fixed loan quotes, in the context of expected LPR declines, customers will generally choose floating rate quotes because the spread is fixed. If the LPR is in an upward cycle due to economic recovery and rising inflation, the mortgage interest rate will also rise accordingly. However, if a fixed interest rate was chosen previously, the mortgage cost will remain unchanged.
Wang Qing, chief macro analyst at Orient Securities, believes that the LPR quotes since August 2019 show that the LPR quotes for terms of more than five years, which are mainly for residential mortgages, have only been lowered by 5 basis points, which is significantly lower than the reduction in the 1-year LPR quotes, which are mainly for corporate loans. Wang Qing believes that this differentiated interest rate cut pattern is expected to be maintained in 2020. However, overall, the LPR quotes for terms of more than five years will also show a slight downward trend in the future.