The Beijing branch of Bank of Communications (BoCoM) has recently given its own definition of a "second" mortgage, which will base on the house property of the applicant rather than the applicant's family.

 

"In Beijing, we will examine whether the loan applicant, either an individual borrower or a co-borrower, is trying to buy a second apartment," said Zhang Xin, an official in charge of the credit management with the BoCoM's Beijing branch.

 

"If any of the co-borrowers already has a house mortgage that hasn't been paid off, his or her new loan application will be considered as a 'second' mortgage. It means the person will have to face a higher down-payment and interest rate," Zhang explained.

 

But he stressed that the bank will not check whether the applicant's spouse has already had an apartment unless the spouse is registered in the lending account as a co-borrower.

 

"Co-borrowers can be couples, parents and children, and sometimes even people of no kinship," he said.

 

What is a second mortgage has been a topic of controversy after the central bank decided to raise mortgage deposits for homebuyers who intend to buy a second apartment, a move aiming to curb speculation on property transactions.

 

In late September, the People's Bank of China, the central bank, and the China Banking Regulatory Commission jointly issued a new rule 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 is even higher, with specific figures determined by commercial banks.

 

A hot debate has since been going on, as the regulators did not define a "second" mortgage, such as whether it regards a borrower and his family members as a whole unit or whether a borrower's families are immune from the new rule.

 

The authorities have left the right of definition up to commercial banks themselves, since their situations on loans and local real estate markets differ, analysts say.

 

Lenders like China Construction Bank and Bank of China have taken a tougher line. They define a "second" mortgage based on the family unit, which means if, say, the husband has already applied for a mortgage and the wife applies for a new loan on another property they will have to offer a 40-percent down payment according to the new rule.

 

The two banks also stipulated that the new rule would also apply to a couple who had bought an apartment on mortgage loans before marriage. The Bank of China even included parents who intend to buy a second apartment in the name of their underage children into its list of "second" mortgage applicants.

 

However, the BoCoM decided to allow its local branches to make their own definitions instead of giving a definitive definition.

 

"We have studied the new rule carefully. A second mortgage based on the individual or the family does not collide with it. Thus, we let local branches set their own standards of their practical needs to tighten supervision and prevent financial risks," said Qian Wenhui, vice president of the BoCoM.

 

Analysts point out that lenders remain cautious because mortgages are the most lucrative personal financial products for them. They must follow the central government's call to curb credit on speculative property transactions and also keep attracting new clients.

 

A bank official in Shanghai who refused to be named admitted that banks would rather sit on the sidelines and see what their rivals' response is than be the first to act to edge out possible mortgage clients.

 

Apart from the BoCoM, the Industrial and Commercial Bank of China and China Merchants Bank also set relatively "loose" definitions on a "second" mortgage, with the individual's new loan application not influenced by his spouse's mortgage record.

 

Another unclear point in the new rule is that whether it shall be apply to home owners who have already paid off their mortgage loans and plan to improve their living standard by buying a bigger apartment.

 

Most banks, including the big four state-owned banks, have all set detailed regulations to allow those who have paid up their mortgages to enjoy the original low down payment and interest rate when applying for new house loans.

 

Industry watchers suggest that by issuing the new rule, the central government aims to squeeze out speculative property buyers but not to hit home owners who wish to improve their own living standards.

 

(Xinhua News Agency November 5, 2007)