Shanghai banks are now working out details on the latest state effort to rein in speculation in the real estate market - an increase in down payments and interest rates for people who hold more than one mortgage.

The new rules also knock out refinancing of existing mortgages and raise interest on commercial loans.

They follow a continuing run-up in Shanghai property prices. Among the latest indicators of a hot market, the city's second-hand housing index surged 6.03 percent in August - the highest growth since 2004.

The central bank issued a risk warning to commercial banks when Shanghai's August mortgages posted the highest growth since 2005.

Home loans at the city's domestic banks increased 7.13 billion yuan (US$946 million) last month, up 1.26 billion yuan from July.

The new mortgage requirements were announced at midnight Thursday by the People's Bank of China and the China Banking Regulatory Commission.

They require mortgage holders who apply for another home loan to produce 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 property mortgage, the down payment requirement and interest rate will be even higher. State authorities did not set specific terms for those loans, instead ordering commercial banks to develop their own rules.

Since June 2006, home buyers have been required to provide a down payment of at least 20 percent on apartments smaller than 90 square meters and 30 percent on larger properties.

Banks contacted yesterday by Shanghai Daily said they were developing detailed rules to implement the state edict.

The Shanghai branch of the Bank of China stopped processing mortgages yesterday until new procedures can be put in place.

"The move is directed at increasing the cost of speculative property transactions," said Wang Shujuan of Orient Securities Co. "The rate move is a big blow for buyers of second properties."

The interest rate penalty amounts to far more than a 10 percent increment, because people who take out multiple mortgages also lose the traditional discount on the benchmark rate.

For instance, the current five-year benchmark lending rate is 7.83 percent, which drops to 6.66 percent after the 15 percent discount allowed by the central bank is subtracted. But multiple mortgage holders will now have to pay a rate of at least 8.61 percent.

"The key to the policy is whether it can be implemented properly," said Orient Securities' Wang. "The biggest challenge is to distinguish a second property purchase."

The central bank's database tracks credit records, but it has potential loopholes.

For instance, a wife can apply for a mortgage under her name and enjoy the preferential interest rate for the family's second property if her husband's name is on the mortgage for the couple's first property.

The authorities also banned mortgage refinancing that might be used for additional housing purchases, and commercial property buyers must come up with a down payment of at least 50 percent for 10-year loans, which carry an interest rate 10 percent higher than the benchmark.

"If property prices keep soaring, more tightening steps will be taken," China Securities Co said in an analysts' report yesterday.

(Shanghai Daily September 29, 2007)