Despite of the regulatory restriction on mortgage refinancing, Chinese households

prepaid an unprecedented amount of mortgage loans between 2021 and 2023, when the

government cut interest rates to combat economic slowdown. Using loan-level data

from a major commercial bank in China, we find that prepayments are most likely to

occur when the gap between households’ own mortgage rate and the current rate

becomes positive. Evidence further suggests that households use precautionary savings

to prepay (rather than refinancing), and prepayment is associated with household

deleverage and consumption reduction. Combining with data on total lending and

UnionPay consumption, we find macro-level evidence that as the national lending rate

decreases, cities with more existing borrowers having a positive gap tend to have

greater prepayment, lending contraction, and consumption reduction, suggesting

counter-productive monetary policy transmission.