Loan Interest Rate Surge Eases... But Rise Inevitable After Base Rate Hike

Fixed-rate mortgage loans drop 0.2%p in ten days
Card loan interest rates likely to rise due to strengthened DSR regulations

[Asia Economy Reporter Ki Ha-young] As market interest rates, including bank bonds, decline, the rapidly rising loan interest rates of commercial banks are showing signs of stabilization. However, if the Bank of Korea raises the base rate and the United States also hikes its base rate faster than expected, the pace of loan interest rate increases is expected to accelerate again.

According to the financial sector on the 14th, as of the 12th, the variable interest rates for mortgage loans (new COFIX-linked) at KB Kookmin, Shinhan, Hana, and Woori Banks range from 3.31% to 4.839% per annum. Compared to the 1st (3.31% to 4.814%), the upper limit rose by 0.025 percentage points in just ten days.

During the same period, the mixed (fixed) interest rates for mortgage loans fell from 3.97%?5.377% to 3.73%?5.16% per annum. The lowest rate decreased by 0.24 percentage points, and the highest rate by 0.217 percentage points. For unsecured loans, the current interest rates for grade 1 borrowers over one year are 3.39% to 4.76%. Compared to the 1st (3.35% to 4.68%), the lower limit rose by 0.04 percentage points and the upper limit by 0.08 percentage points.

Compared to Bank A, where the unsecured loan interest rates’ upper and lower limits both increased by 0.21 percentage points in just one day between the 31st of last month (3.47%?4.47%) and the 1st of this month (3.68%?4.68%), the pace of increase has slowed down.

The reason the upward trend in loan interest rates has paused like this is that the market interest rates, which serve as indicators for loan rates, have stabilized. According to the Korea Financial Investment Association’s Bond Information Center, the 5-year bank bond (AAA, unsecured) interest rate, most commonly used as a benchmark for fixed-rate mortgage loans, dropped from 2.614% on the 1st to 2.404% on the 12th, a decrease of 0.21 percentage points. The 1-year bank bond (AAA, unsecured) interest rate, an indicator for unsecured loans, also fell from 1.761% to 1.627%, a 0.134 percentage point drop during the same period. The COFIX rate, which is the benchmark for variable-rate mortgage loans, remained unchanged at 1.16% (new COFIX basis) on both the 1st and the 12th.

The near completion of banks’ measures to expand additional interest rates and reduce preferential rates in response to government pressure on household loan regulations at the end of last month also contributed to calming the rapid rise in loan interest rates.

However, in the medium to long term, the upward trend in loan interest rates is expected to continue. The Bank of Korea’s Monetary Policy Committee is expected to raise the base rate by 0.25 percentage points on the 25th and to implement an additional 0.25 percentage point hike early next year. This is because inflationary pressure remains high, with the consumer price index rising above 3%, and financial imbalances such as household loan growth and asset price increases are still at serious levels, which is the committee’s fundamental view.

There is also a possibility that the United States will raise its base rate faster than expected due to unstable inflation. The U.S. Consumer Price Index (CPI) for October rose 6.2% compared to a year earlier, marking the highest year-on-year increase in nearly 31 years since December 1990.

Not only bank loan interest rates but also card loan interest rates in the secondary financial sector are expected to rise. From January next year, the Debt Service Ratio (DSR) will be applied to card loans. Card companies anticipate that card loan volumes will decrease by 20?30%, and card bond interest rates will rise, forcing them to increase card loan interest rates.

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