Mortgage loan rates in Korea soar on higher market rates

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Interest rates on household loans at South Korean banks are rising again, not just at commercial banks but also at online-only lenders. Analysts note that the rise reflects increasing market interest rates and the financial authorities’ concern over the recent increase in household lending. Some also raise concerns that lenders with actual demand may face higher loan threshold as a result.

According to data from the Korea Federation of Banks on Wednesday, the annual average interest rate on an installment mortgage loan newly offered by KakaoBank Corp. last month was 4.16 percent, up 0.14 percentage point from 4.02 percent a month ago. The average interest rate of K Bank Co.’s mortgage loan also rose by 0.03 percentage point to 4.17 percent from 4.14 percent during the same period. It means that the mortgage loan rates at online banks, which was touted as the lowest in the banking sector with a 3-percent range between April and June, is at 4 percent annual level.

KakaoBank’s mortgage loans with interest rates under 4.0-4.5 percent accounted for 80.2 percent of the entire mortgage loans last month, higher than 54 percent in the previous month.

The annual average interest rate of mortgage loans at Korea’s four major commercial banks - KB, Shinhan, Hana, and Woori - was 4.28-4.65 percent last month. Although it remains in the mid to higher 4 percent range, observers note that it is only a matter of time before it climbs back up to the 5 percent range. The variable mortgage rates announced by the four banks on Wednesday ranged between 4.21 and 6.1 percent and the fixed mortgage rates between 3.83 and 5.97 percent. The top rate, an indicator of interest rate trends, rose to as high as 6 percent per year.

The Korea Housing Finance Corp. (KHFC) announced on the same day that it will raise the interest rate on its special housing loan by 0.25 percentage point for the regular type and 0.20 percentage point for the preferential type in September. The regular rate will be 4.65 to 4.95 percent per year, and the preferential rate 4.25 to 4.55 percent. It is the first time the preferential rate has been raised since the special housing loan was launched in late January.

“Rising rates of government bonds and mortgage-backed securities (MBS) have increased the cost of financing, and the higher-than-expected amount of loan applications led us to adjust the interest rate,” said an official from the KHFC.

The increase in lending rates, which had been stabilizing in recent months, comes as market interest rates are rising.

According to the Korea Financial Investment, the interest rate on five-year financial bonds rated AAA, the benchmark for lending rates, has risen to 4.3-4.4 percent a year, the highest level this year, in the wake of a sharp rise in U.S. Treasury rates.

“The upward trend in mortgage interest rates is becoming clear,” said a commercial bank official.

Another change to be noted is that expectations for the rate hike to end are fading and more observers are predicting a prolonged high interest rate situation. As the future of interest rates becomes uncertain, more borrowers are opting for fixed-rate mortgage loans. In July, the share of fixed-rate loans was 73.7 percent, up 0.6 percentage points from a month earlier.

Meanwhile, expectations grow that banks will begin scaling back lending in earnest with the financial authorities’ attempt to overhaul 50-year mortgages, which have been blamed for the increase in household loans. The financial authorities are conducting on-site inspections of the five largest banks on their handling of household loans. Online banks are also reducing loan marketing such as special loan offers. KakaoBank had been aggressive to attract customers with low interest rates, but it is now cutting back on interest rate discounts.