Recently, some banks in China have introduced a new type of mortgage called “interest-first, principal-later,” with the longest repayment period extending up to 10 years. Customers have the option to pay as little as 1 yuan (Chinese Yuan, equivalent to around 0.15 USD) towards the principal each month. Among the banks offering this service is the state-owned Construction Bank.
According to a netizen based in Shanghai, customers with existing mortgages at Construction Bank can apply to switch their repayment method to “interest-first, principal-later” through the bank’s mobile app. By selecting a 24-month “interest-first, principal-later” plan, the minimum monthly principal repayment is only 1 yuan, after which the repayment method reverts back to equal principal and interest payments.
Another netizen named Lin Song also shared that they modified their mortgage repayment method to “interest-first, principal-later” using the Construction Bank app. Social media posts indicate that in some regions, Construction Bank and Industrial Bank allow existing mortgage holders to adjust their repayment method to “interest-first, principal-later.”
The “interest-first, principal-later” model involves paying the interest first and then gradually repaying the principal as per the agreed terms after the loan is disbursed.
In response to this trend, Industrial Bank has confirmed that existing mortgage customers can opt for the “interest-first, principal-later” repayment scheme. Construction Bank and CITIC Bank stated that customers in Guangzhou seeking new mortgage loans are eligible for this repayment method.
Previously, Ping An Bank promoted a two-stage repayment system for its mortgage loans, allowing customers to pay only interest for the first three years without repaying the principal. Following this initial period, customers switch to equal principal and interest monthly payments for the remaining loan term, which can vary from 10 to 30 years. This service is available in cities such as Shanghai, Guangzhou, Chengdu, Hangzhou, Chongqing, Dalian, and Xiamen.
A loan manager from a certain bank mentioned, “For those looking to minimize initial repayment pressure, they can consider ‘interest-first, principal-later’ with a loan term of 3 years. Our bank typically approves up to 10 years with a no principal repayment continuation every three years. This means that with good credit standing, one can avoid repaying the principal for up to 10 years.”
According to financial information from Times Finance, as of June 6th, the “interest-first, principal-later” mortgage scheme has been implemented in cities including Guangzhou, Beijing, Xi’an, Zhengzhou, Suzhou, and Qingyuan. The availability of this scheme varies among banks in different cities and some banks offer it only for new loans while others for existing loans, with a few accommodating both types.
Zheng Dayuan, the general manager of Guangzhou Dayuan Mortgage Agency, stated that in Guangzhou, banks such as China Resources Bank, Guangfa Bank, Pudong Development Bank, CITIC Bank, Industrial Bank, and Agricultural Bank allow for the “interest-first, principal-later” approach with interest-only periods ranging from 2 to 5 years.
Public information shows that numerous real estate developments in Guangzhou are actively promoting their support for the “interest-first, principal-later” model.
Although the “interest-first, principal-later” repayment method may alleviate initial repayment pressure for borrowers, for those with sufficient funds, this approach may not be cost-effective in the long run.
Calculating based on the current first-home mortgage rate adjustment in Guangzhou at 3.4%, a loan amount of 1 million RMB, a term of 30 years, and repayment via equal principal and interest payments, the total repayment amount would be 596,533.09 RMB. Comparatively, adopting the new “interest-first, principal-later” repayment method would result in a total interest payment of 101,999.88 RMB for the first three years and a total repayment of 631,580.30 RMB after 3 years, which is 35,047.21 RMB higher than the conventional repayment method.
Industry experts believe that the primary reason multiple banks have introduced the “interest-first, principal-later” repayment method is to prevent borrowers from defaulting directly.
A banking professional from Guangzhou mentioned to Finance News, “Given the significant drop in housing prices currently, banks are cautious about foreclosing on properties through legal means as some properties may have become liabilities, and selling them might not cover the outstanding loans. Instead of letting these mortgages turn sour, it’s better for both parties to navigate this difficult period together and ‘weather the storm.’ For a considerable period, most banks have implicitly agreed on this, with very few banks publicly promoting these terms.”
The banking professional further highlighted, “The most significant issue in the real estate sector now is the lack of property buyers, while the banking industry’s major issue is the absence of loan applicants. Only when social income rises, companies can make profits, can the real estate industry emerge from this crisis.”