Homeowners will have larger mortgage repayments when they return from their May Day holidays as a leading lender has raised its interest rate.

China's Public Housing Fund (PHF) will raise mortgage rates for individual house buyers by 18 basis points from May 8, according to the Ministry of Construction, which supervises the PHF.

The annual interest rate for loans taken out over five years or less will be increased from 3.96 per cent to 4.14 per cent, according to the ministry's announcement on Saturday.

Loans for a period of more than five years will be increased to 4.59 per cent from 4.41 per cent, it said.

Established in the 1990s, the PHF was designed to help medium- and low-income State employees buy a home.

PHF mortgage loans carry lower interest rates than commercial mortgages.

Employees are required to contribute 5 to 12 per cent of their salaries to the fund before taking out their loans, with their employers contributing the same amount.

This lump sum can be put down as a deposit when employees buy a home.

On Friday, China's central bank raised the benchmark lending rate for one-year loans by 27 basis points from 5.58 per cent to 5.85 per cent, the first hike since October 2004, to prevent the economy from overheating, reports said.

The rate for deposits remains unchanged.

The lending rate hike received mixed reactions from homeowners and real estate developers.

An online survey conducted by soufun.com, a popular real estate website, indicated that more than 75 per cent of people thought the interest rate hike was "irrational" and "inconvenient." And three quarters said house buyers were the largest victims of the adjustment.

The number of phone calls relating to PHF mortgage loans has risen in the past two days, said an employee with Beijing's PHF management centre yesterday.

Pan Shiyi, a well-known real estate developer and chairman of SOHO China, said the rate hike sends a signal that the government will use macro-control measures instead of administrative orders to curb the overheated economy and rising housing prices.

Raising the lending rate will increase the cost of mortgages and dampen enthusiasm to buy homes, said Fan Jianping, director of the economic prediction department of the State Information Centre, Xinhua reported.

"If the overheated economy continues in the second quarter, there might be another interest rate hike in 2006," said Wang Xiaoguang, an economist with the National Development and Reform Commission.

The country's economy is growing at a quicker-than-expected rate, soaring by 10.2 per cent in the first quarter of this year.

Source: China Daily