Mortgage Prepayments in China and Monetary Policy Transmission

Abstract

Despite restrictions on mortgage refinancing, Chinese households prepaid an unprecedented amount of mortgage loans between 2021 and 2023, when the government cut interest rates to combat economic slowdown. Using loan-level data from a large commercial bank in China, we find that households are likely to prepay when the gap between their own mortgage rate and the benchmark rate becomes positive and increases. Evidence further suggests that households prepay with their savings (rather than through refinancing), and the prepayment is associated with household deleveraging and consumption reduction. Combining this with the data of UnionPay card spending, we find macro-level evidence that as the national lending rate decreases, cities with more mortgage borrowers having a positive rate gap tend to experience greater prepayment, consumption reduction, and lending contraction, suggesting counterproductive monetary policy transmission.

Keywords: Mortgage Prepayments, Monetary Policy Transmission, Household Consumption