(Yicai Global) May 11 -- As the interest rates for corporate loans to small and medium-sized enterprises in China hit historic lows, some homebuyers are using the business loans to repay home loans. The illicit use of these funds is difficult to prevent due to the big difference in borrowing costs.

"This year's interest rate on business loans for small and medium-sized firms is the lowest ever at 3.7 percent," a moneylender told Yicai Global. Yet although mortgage rates are falling, they remain significantly higher at an average of 5.17 percent for first-time purchases and 5.45 percent for second homes, according to the Beike Research Institute.

As a result, many clients have converted their mortgages into business loans this year, especially those buying their second property, the moneylender said.

Only random checks are made so once the loans are issued, it is difficult to monitor how they are used, Yicai Global has learned.

It is illegal for a business loan to be used to repay a mortgage, Zheng Bo'en, a lawyer at Guangdong Zhongju Law Firm, told Yicai Global. Should the bank find out, it should immediately ask the borrower to repay the loan and if he or she is unable to repay it becomes loan fraud.

However, some banks are becoming more willing to convert mortgages into business loans so long as the loan agent prepares the necessary paperwork, industry insiders said. Banks tend to have a certain amount of funds in business loans to lend to smaller businesses. But with the current economic environment, they prefer to package these loans as mortgages, which are repaid steadily, and let the agent make the conversion.

Some CNY2.1 billion (USD320 million) worth of corporate loans flowed into the real estate sector from January to August last year, according to the Shenzhen Public Information office.

Editor: Kim Taylor