Loans News
- Shanghai News
Date: 13-Mar-2007 Sources: (Xinhua Online)
Banks in Shanghai are offering new products to compete for mortgage loans as more people opt to invest in the stock market rather than the sluggish real estate sector.
Shenzhen Development Bank started offering a 'balloon loan' on Feb. 13.
Most mortgages charge a higher rate of interest the longer the duration of the loan and in return, borrowers make smaller monthly payments.
A balloon loan is different. It has one large payment due upon maturity, but often has the advantage of low interest payments. It thus requires a low capital outlay during the life of the loan.
For instance, the Shenzhen-based lender offers a five-year balloon loan with an interest rate of 4.59 percent - the same rate as a regular five-year mortgage. Borrowers can also opt to make monthly payments equivalent to that of the 30-year mortgage.
The bank is the first domestic lender to introduce to China the widely accepted concept in Western countries.
'The product is designed for clients with the ability to pay back the loan in advance,' said Zhu Yizhong, a Shenzhen Development Bank Shanghai branch official with the individual credit center. 'The biggest attraction of the product is the low interest rate and low monthly payment.'
According to Zhu, about 80 percent of mortgage borrowers will pay back loans in five or six years.
Since most of the loan is deferred until the end of the payment period, the borrower has substantial flexibility to utilize the money that would have gone to higher monthly payments from a regular mortgage.
The major problem with such a loan is that the borrower needs to be disciplined in preparing for the large single payment.
The loan is suitable to those who need a large sum of financing, but have the ability to pay it back in a short period.
Zhu said balloon loans have been popular since they were offered.
'Of our clients that knew about balloon loans, one hundred percent have chosen that type of mortgage,' said Zhu.
Balloon loans generate less profit for the banks compared with regular mortgages.
Still, Chinese lenders want to attract more clients by boosting mortgage products amid the sluggish real estate market, which is in contrast to the country's rising stock market.
Banks in Shanghai are offering new products to compete for mortgage loans as more people opt to invest in the stock market rather than the sluggish real estate sector.
Shenzhen Development Bank started offering a 'balloon loan' on Feb. 13.
Most mortgages charge a higher rate of interest the longer the duration of the loan and in return, borrowers make smaller monthly payments.
A balloon loan is different. It has one large payment due upon maturity, but often has the advantage of low interest payments. It thus requires a low capital outlay during the life of the loan.
For instance, the Shenzhen-based lender offers a five-year balloon loan with an interest rate of 4.59 percent - the same rate as a regular five-year mortgage. Borrowers can also opt to make monthly payments equivalent to that of the 30-year mortgage.
The bank is the first domestic lender to introduce to China the widely accepted concept in Western countries.
'The product is designed for clients with the ability to pay back the loan in advance,' said Zhu Yizhong, a Shenzhen Development Bank Shanghai branch official with the individual credit center. 'The biggest attraction of the product is the low interest rate and low monthly payment.'
According to Zhu, about 80 percent of mortgage borrowers will pay back loans in five or six years.
Since most of the loan is deferred until the end of the payment period, the borrower has substantial flexibility to utilize the money that would have gone to higher monthly payments from a regular mortgage.
The major problem with such a loan is that the borrower needs to be disciplined in preparing for the large single payment.
The loan is suitable to those who need a large sum of financing, but have the ability to pay it back in a short period.
Zhu said balloon loans have been popular since they were offered.
'Of our clients that knew about balloon loans, one hundred percent have chosen that type of mortgage,' said Zhu.
Balloon loans generate less profit for the banks compared with regular mortgages.
Still, Chinese lenders want to attract more clients by boosting mortgage products amid the sluggish real estate market, which is in contrast to the country's rising stock market.
The barometer Shanghai Composite Index surged 130 percent last year, attracting billions of capital into the market while housing prices dropped 3.2% in the city last year compared to 2005, according to the Shanghai Housing and Land Resources Administrative Bureau.
Some property owners have even sold their apartments to use the money to invest in stock markets in search of higher returns.
Other banks are making moves to increase mortgage loans.
The Shanghai branch of the Agricultural Bank of China said in February it will waive insurance on mortgages - the first of the big-four state-owned banks to cut that cost for anyone applying for a home loan.
Bank of China, China Construction Bank and Industrial and Commercial Bank of China waive the insurance for 'highly-qualified' clients.
ABC also waived the need for a lawyer's guarantee, thus reducing legal fees. The two cuts can help save mortgage borrowers about 10,000 yuan (1,282 U.S. dollars).
'We hope the preferential services will attract more clients amid the sluggish property market,' said an ABC official. 'However, it is still too early to see how the market will respond.'
Bank of Communications, the country's fifth biggest lender, has waived insurance on mortgages nationwide since 2005.
ABC also offers a 15 percent discount on interest to individuals applying for a mortgage to purchase a second property. The bank is the first in the city to offer the preferential interest rate to buyers of a second property.
'Individual mortgages are a lucrative business,' said Qiu Zhicheng, a Haitong Securities Co analyst. 'When floating mortgage rates hover around five percent, lenders' cost on it sits at 1.1 on average.'
The outstanding value of individual mortgages in the city dropped six billion yuan at the end of 2006, according to the Shanghai headquarters of the People's Bank of China. It did not provide any comparative figures.
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