Korea’s mortgage loan rates poised to top 8%, delinquency rate up

Bank counter [Photo by Lee Chung-woo]

Borrowing costs in South Korea are zooming up, with the country’s mortgage loan rates poised to top 8 percent in line with a surge in deposit rates, and the delinquency rate on bank loans is also on an upward trend.

The Korea Federation of Banks announced a new rate of the cost of fund index (COFIX), which reflects banks’ average funding costs for short-term lending and the reference rate for variable-rate mortgages, hit 4.34 percent in November, breaking the 4-percent threshold for the first time since the related data started to be compiled in 2010. It stood at 3.98 percent in the previous month.

The rapid rate gain will be immediately reflected in bank loan rates. On the same day, Woori Bank announced that it would raise its rates for new mortgage loans to 6.92 ~ 7.72 percent per annum from the previous range of 6.56 ~ 7.36 percent. KB will follow suit, increasing the loan rates to 6.27 ~ 7.67 percent from 5.91 ~ 7.31 percent.

With the rise of COFIX, variable rates for mortgage loans is soon expected to top 8 percent, up 2 percentage points in six months.

COFIX has risen in sync with deposit rate hikes, as domestic banks are in race to secure funds with the sale of high-interest deposit products at an annual interest rate of 5 percent or higher. Reflecting the trend, the loan rates for Jeonse, a type of lease based on a key money deposit, is expected to rise. The rates for Jeonse loans are currently between 5.16 percent and 7.33 percent.

However, domestic lenders have vowed to lower Jeonse loan rates. NB Bank plans to decrease by up to 1.10 percentage points in January next year.

With the soaring borrowing costs, the country’s delinquency rate on bank loans has reversed its course and started rising for the first time in four years. According to data released by the Financial Supervisory Service, the estimated delinquency rate in October rose 0.03 percentage point from a month ago to 0.24 percent.