(Yicai) July 18 -- People preparing to purchase property in China need to be aware of what is involved when choosing to take out a new type of housing loan that has come onto the market, which allows them to repay the interest first, before repaying the principal, the Shenzhen branch of the National Financial Regulatory Administration said yesterday.

A new type of mortgage is being rolled out by banks, such as Ping An Bank, China Construction Bank as well as Industrial and Commercial Bank of China, which allows borrowers to pay back the interest first and after that the principal, unlike most loans which require a fixed repayment of principal and interest each month. It means that the repayments start off small but get bigger and bigger and the interest accrued also increases.

One such loan, called a ‘Balloon Mortgage,’ targets properties that are for both residential and commercial use. Borrowers need to pay back the principal and interest within the term of the loan, but the majority of the principal is paid at the end.

And another one, called “Easy Repayment,” allows borrowers to just pay back CNY1 (USD0.14) in principal, plus the interest due, in the first two years. The remainder of the principal can be repaid in the third year.

Normally, a five-year loan of CNY1 million (USD137,767) with an annualized interest rate of 5 percent, would require a fixed monthly repayment, including both principal and interest, of CNY18,871 (USD2,600). The total amount of interest paid over the course of the loan would come to CNY132,000 (USD18,185).

However, monthly repayments for the same loan under the “Balloon Mortgage” come to CNY6,599 (USD909) and the interest paid amounts to CNY230,800.

Consumers should carefully read the small print before they decide to take out a loan, in order to understand how the interest is calculated, methods of repayment and other binding terms, the NFRA’s Shenzhen branch said. Consumers should also develop good credit habits, repay loans on time and turn to reasonable channels for the resolution of issues, it added.

In recent years, China has relaxed its policies on housing loans and banks have been allowed to come up with new mortgage products for individuals so long as they comply with laws and regulations and remain within their operating scope, said Zhou Yiqin, a senior expert in financial regulatory policies.

Editor: Kim Taylor