Due to Base Rate Hike... Gwangju Bank Also Raises 'Loan Threshold'

COFIX Announcement on the 15th of Next Month... Household Loan Interest Rates Expected to Rise

Credit Loan Limit 'Strengthened' Adjusted from 150% to 100% of Annual Income

[Asia Economy Honam Reporting Headquarters Reporter Park Jin-hyung] As the base interest rate rises, the household loan interest rates of Gwangju Bank are also expected to increase around next month.

First, market interest rates consist of the base interest rate plus the spread (risk premium).

The Bank of Korea base interest rate is representative. The Monetary Policy Committee of the Bank of Korea raised the base interest rate from 0.5% to 0.75% the day before. This is the first rate hike since November 2018, marking the end of the 'ultra-low interest rate era.'

With expectations of additional hikes in October to November, the possibility of a larger increase in market interest rates cannot be ruled out.

Generally, interest rate cycles are difficult to predict, but once they change, they rarely reverse direction easily. If the interest rate policy has shifted towards 'rising,' it is likely to continue until the target level is reached. Typically, interest rate cycles tend to change every 2 to 5 years.

Accordingly, the COFIX (Cost of Funds Index), which is used as the base rate for personal unsecured loans and jeonse deposit loans, is expected to face upward pressure.

It is predicted that household loan interest rates will show an upward trend starting from the COFIX announcement on the 15th of next month.

The COFIX rate is the weighted average interest rate of funds raised by domestic banks, including fixed deposits, installment savings, mutual installment savings, housing installment savings, and negotiable certificates of deposit.

According to the Korea Federation of Banks, as of last month, the average interest rate for general unsecured loans at Gwangju Bank was 5.81%, and the average interest rate for mortgage loans (installment repayment method with a maturity of 10 years or more) was 3.1%.

A Gwangju Bank official explained, "Even if the base interest rate rises by 0.25 percentage points, it may not be reflected exactly as is," adding, "Complex factors such as how deposit interest rates, which can be seen as the bank's funding costs, change will also play a role."

The credit loan limit will also be tightened.

Starting next month, Gwangju Bank plans to lower the credit loan limit from 150% of annual income to 100% (up to 100 million KRW) to reduce the growth rate of household debt.

Looking at the regional financial institution loan and deposit trends announced by the Bank of Korea Gwangju-Jeonnam Headquarters, as of the end of June, the household loan balance was 30.3505 trillion KRW at deposit banks and 26.3974 trillion KRW at non-bank institutions, totaling 56.7479 trillion KRW.

There is also a forecast that the Bank of Korea’s base rate hike will raise expectations for an expansion of banks’ net interest margin (NIM).

Researcher Koo Kyung-hoe of SK Securities analyzed, "In fact, the interest rate spread between bank deposits and loans has been flat this year, but with the base interest rate rising in this situation, it leads to a rise in market interest rates, increasing the likelihood of an expansion in the interest rate spread and net interest margin."

This content was produced with the assistance of AI translation services.