In the News

Central bank sets mortgage interest rate floor

• Publication Date：04/02/2010
• Source： United Daily News

The Central Bank of the Republic of China has instructed banks to refrain from granting mortgages at interest rates lower than 1.5 percent, unnamed executives from banks in the private sector said.

Recent competition in lowering interest rates on housing loans has elicited concern from the central bank, which has been adopting an ethical approach to prevent the industry from slashing rates further.

In an attempt to stabilize the real estate market, the CBC had previously directed banks that are partially owned by the government to reduce loan-to-value ratios, raise interest rates and remove grace periods on mortgages for investment-oriented or luxury property.

The private sector has taken advantage of these guidelines for government-related banks by lowering interest rates to 1.35 percent or 1.3 percent, with some slicing to below 1 percent to lure clients, bank executives said.

Major banks as a result were forced to follow suit to defend their markets. Market leaders such as the Land Bank of Taiwan offered 1.45 percent for the first six months of mortgage repayment to customers with annual income surpassing NT$1.5 million (US$47,188).

The central bank then took the issue to the Land Bank of Taiwan, the Taiwan Cooperative Bank and others engaging fierce price competition.

Some major commercial banks had readied action plans offering mortgages at lower than 1.5 percent after the Land Bank of Taiwan’s introduction of a 1.45-percent interest rate. But the central bank’s concerns have convinced them to scrap the price war.

The central bank has clearly indicated its stance barring major banks from price competition and prohibiting interest rates for housing loans from falling below the market consensus base limit of 1.5 percent. The measure is aimed at curtailing creditor banks’ risks in the event of monetary policy tightening.

In addition to the limits on interest charges, the CBC should consider other measures to counter speculation and the bursting of property bubbles, according to the banking community. A standard loan-to-debt ratio should be set for mortgages for second or third houses or luxury homes. Such a practice could reduce lending banks’ risks, while preventing investor speculation in the real estate market, they added. (HML-THN)