LPR has dropped for the third time this year, which will help reduce borrowers’ interest burden and promote consumption

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LPR has dropped for the third time this year, which will help reduce borrowers’ interest burden and promote consumption

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On October 21, the People’s Bank of China authorized the National Interbank Funding Center to announce that the Loan Prime Rate (LPR) for October 2024 stands at 3.1% for the one-year term and 3.6% for terms of five years and above, reflecting a decrease of 25 basis points from the previous month.

In an interview, Dong Ximiao, Chief Researcher at Zhailian, noted that this reduction is the third decline in the LPR this year and represents the largest drop since the reform of the LPR mechanism in August 2019. “The decrease in the LPR will drive down loan rates for both businesses and individuals, ultimately lowering financing costs and stimulating effective demand,” he explained. He emphasized that this month’s adjustment showcases a significant strengthening of monetary policy implementation, with financial support for the real economy intensifying.

Dong further elaborated on the implications for the housing market, stating, “The substantial reduction in the LPR is likely to lead to lower interest rates on both existing and new mortgages, which will ease the housing consumption burden for residents and enhance their willingness and ability to invest in real estate.” Since the beginning of the year, the five-year LPR has decreased by a total of 60 basis points. For those planning to take out a mortgage, this signifies a reduction in interest costs. Meanwhile, existing mortgage borrowers will benefit from an overall decline of 0.6 percentage points in the LPR this year, along with a concurrent average reduction of about 0.5 percentage points in rates adjusted by commercial banks on October 25. Collectively, this means that mortgage rates could fall by over 1 percentage point in 2024.

To illustrate, consider a borrower in Beijing with a mortgage that is set to reset on January 1 each year. Currently, their mortgage interest rate stands at 4.75% (based on the 2024 LPR plus 55 basis points). The rate adjustment will occur in two phases: first, on October 25, commercial banks will collectively reduce the rate to 3.9% (LPR minus 30 basis points), a decrease of 0.85 percentage points. Then, on January 1, 2025, if the five-year LPR is 3.6%, the mortgage rate will adjust further to 3.3% (again LPR minus 30 basis points), a further drop of 0.6 percentage points.

Calculations suggest that by the conclusion of these adjustments, the cumulative drop in the mortgage interest rate in 2024 could be 1.45 percentage points. For a loan principal of 1 million yuan, repaid over 25 years using equal principal and interest, this translates to a total reduction in interest payments of over 240,000 yuan, with monthly repayments decreasing by more than 800 yuan.