THE definition of a second mortgage has been a hot topic after the Chinese central bank rolled out further measures to tighten credit requirements and curb speculative property transactions.
On September 27, the People's Bank of China and the China Banking Regulatory Commission jointly issued a ruling that requires mortgage holders who apply for another home loan to put a down payment of at least 40 percent and pay a 10-percent premium on their interest rate.
For people seeking a third or fourth mortgage, the down payment requirement and interest rate should be even higher, with specific figures determined by commercial banks.
On October 8, Su Ning, deputy governor of the PBOC, said it is unlikely for mortgage applicants to apply for a second mortgage at a different bank to get around the tighter credit requirement without being tracked by the central bank's nationwide individual credit database.
Su's remark seems to suggest such practices would be a thing of the past.
Before the new rule, most commercial banks defined a second mortgage only as one that followed an earlier mortgage at the same bank, said an unnamed bank official in charge of personal lending business quoting the industry-wide practice. There was also no way of tracking his other mortgages at other banks. This meant a person's mortgage application was considered a first one at bank B even if he already had a mortgage from bank A.
Most banks in Shanghai, including the state-owned big four and the Bank of Communications and China Merchants Bank, said they are still formulating detailed rules to act on the authorities' call to tighten up.
An unnamed bank official admits banks would rather sit on the sidelines and see what their rivals' response is than be the first to come out and highlight their new rules.
Banks have a delicate balance to perform - follow the central government's orders and yet still attract clients for the most lucrative personal financial products.
A hot debate going on is whether the second mortgage is based on the mortgage applicant or the applicant's family as it is not clarified by the authorities.
Going by previous practice, lenders including the Bank of Communications and China Construction Bank defined a mortgage based on the family unit. So if, say, the husband has already applied for a mortgage and the wife is set to apply for a new loan on another property, BoCom and CCB in Shanghai consider this new mortgage as the second one even if it is the first for the wife. But practices vary from bank to bank.
Dai Gen, an official with the central bank's credit center, said it is hard for the nationwide credit database to track credit information of a spouse if the person has not applied for a mortgage before, Caijing magazine reported.
This means, even if the definition is based on a family, banks have to turn to the property authorities for more information.
The PBOC and CBRC rule states that home owners who have already "make use of" a mortgage to buy a property to live in and are planning a mortgage for a second home should make a bigger down payment and pay higher interest rate.
But it is not clear whether the new rule applies to home owners who have already paid back the mortgage and plan to improve their living standard by buying a bigger home.
Industry watchers suggest that by issuing this rule the central government aims to squeeze out speculative property buyers and not to hit home owners who wish to improve their own living standards.
New individual mortgages at domestic banks in Shanghai in the third quarter nearly tripled the growth in the first half due to the city's active property market.
New individual mortgage topped 19.13 billion yuan (US$2.54 billion) in the third quarter at the city's domestic banks, up 12.3 billion yuan from the first half, the Shanghai office of the PBOC said earlier this month.
The third quarter's new individual home loans accounted for 91 percent of the total new individual consuming loans in the city.