(Yicai Global) Aug. 26 -- The People's Bank of China has unveiled a new minimum interest rate system to prevent cheap mortgages after introducing a loan prime rate mechanism to facilitate corporate borrowing.

Starting Oct. 8, first home mortgage rates must not fall below the LPR and second-home rates must be at least 60 basis points above it, the central bank said yesterday.

"One thing is certain, the interest rate of mortgages will not fall," Liu Guoqiang, deputy governor of the PBOC, said last week after introducing the newly reformed LPR system. The loan prime rate is that which banks offer to their best-rated credit customers and the central bank hopes bringing in the system would help more money enter the real economy.

The PBOC's National Interbank Funding Center will set two LPRs, one for one-year loans and one for five years, at 9.30 a.m. on the 20th day of every month, the central bank said on Aug. 17. It will fix the rate based on market-led medium-term lending facilities.

"Defining the lower limit of mortgage interest rates reflects the structural characteristics of the monetary policy and can more effectively guide the flow of credit resources to the real economy," said Fan Ruoying, a researcher at the Bank of China's Institute of International Finance.

China still needs to reduce loan rates for brick-and-mortar companies, Fan added, saying high home prices have led to higher homeowner leverage ratios and fragility of the country's financial system, so it is also important not to allow masses of cash to flow into the property market.

The average mortgage for first-time buyers in China was 5.44 percent in July, about 1.1 times the benchmark interest rate, according to the Rong360 Big Data Research Institute. For second-time buyers, the figure was 5.76 percent.

Rate-setting restrictions in some cities meant that their average rate was below the benchmark, though this will change when the new policy comes into play. Minimum mortgage rates in cities where banks could previously lend at 10 percent below the benchmark will now rise to 4.85 percent -- the current five-year LPR -- from 4.41 percent. The one-year LPR is 4.25 percent.

Editor: James Boynton