What does LPR interest rate conversion mean? How does LPR interest rate affect mortgage loans?

With the update of the 2020 mortgage interest rate policy, many people don’t know what the LPR interest rate conversion means. In fact, whether to convert to LPR depends on personal preference. One type is a fixed conservative, who always keeps the bank’s interest rate and will not change it. LPR is a bit like a bet, and whether the interest rate will go down or up in the future is your own choice. Next, let’s take a look at the impact of LPR interest rates on mortgages!

What does LPR interest rate conversion mean?

1. The LPR rate is a new loan base rate that replaces the previous fixed rate. It is a floating rate that can rise or fall.

2. The LPR rate is the common quotation of 18 banks. The lowest and highest values ​​are removed, and then the average is taken to get the LPR rate.

3. The LPR interest rate is updated once a month, which is equivalent to our loan interest rate changing from an annual interest rate to a monthly interest rate, and it is floating, but generally does not change much

4. The LPR interest rate is updated on the 20th of each month. You can also negotiate the update time with the bank. The shortest time is one year.

5. LPR interest rates are divided into 1-year and 5-year periods. The 1-year period is for mortgage loans with a term of less than 5 years, and the 5-year period is for mortgage loans with a term of more than 5 years.

How does the LPR rate affect mortgage loans?

1. If you have a long remaining loan repayment period, regardless of whether the interest rate is discounted or increased, I recommend that you choose the LPR interest rate without hesitation.

Because in the long run, lower interest rates are a global trend. Japan and the European Union are now implementing negative interest rates. Although China has the ability to delay entering the era of negative interest rates, it is still likely that interest rates will fall. If the LPR falls, the monthly payment may be reduced by a little bit, but no matter how small the mosquito is, it is still meat, and it smells good!

2. If your remaining mortgage is small and the repayment period is short, it doesn’t make much sense to transfer or not.

3. If you are bullish on future interest rate trends, you can choose a fixed interest rate. The rise and fall of the LPR interest rate in the future will not affect you.

How is LPR priced?

After the reform of the LPR formation mechanism, a total of 7 quotes were implemented from August 20 last year to February 20 this year. The one-year LPR rate dropped from 4.31% to 4.05%, and the five-year and above rate dropped from 4.85% to 4.75%. In the future, the central bank's loan benchmark interest rate will gradually withdraw, and the pricing power of loan interest rates will be fully transferred to LPR, which will be decided by the market.

After the LPR made its grand debut, 90% of newly issued loans have been priced according to the LPR rather than the benchmark interest rate. Therefore, the central bank has begun to promote the pricing conversion of existing loans. This is why the central bank requires owners with personal mortgage loans to start making choices. For commercial housing loans, either the interest rate pricing benchmark must be converted to LPR or a fixed interest rate must be chosen. Provident Fund loan users are not included.

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In short, the central bank has given mortgage holders a choice: should they choose a fixed interest rate or a floating interest rate of "LPR+plus points"?

Option 1: Fixed interest rate. After choosing a fixed interest rate, your mortgage will maintain the current interest rate level and will not be affected by changes in the LPR interest rate.

Option 2: "LPR+add-on" floating interest rate. LPR is the loan market benchmark rate, a new mechanism introduced by the central bank in 2019. LPR is announced once a month and can rise or fall. The add-on value = the current execution interest rate level of the original contract - the LPR released in December 2019. The add-on value is fixed after it is determined.

In other words, if you choose the "LPR+plus point" floating interest rate, your future mortgage interest rate will change with the LPR, which will affect the monthly payment.

It should be emphasized that the borrower has only one option and cannot convert again after conversion.