Mortgage Loans Approaching 7% Era Amid Interest Rate Hike Rally

Possibility of Real Interest Rate Reduction Amid Bank Loan Competition

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As the trend of raising the base interest rate is expected to continue due to domestic and international inflationary pressures, there is a forecast that bank mortgage loan interest rates could reach the 7% range within this year.

According to the financial sector on the 17th, the variable interest rates for mortgage loans (new COFIX-linked) to be applied on the 18th by the four major banks?KB Kookmin, Shinhan, Hana, and Woori?range from 3.420% to 5.342% per annum. The upper limit has increased by 0.272 percentage points over the past three months this year. The upper limit of mortgage loan interest rates at some banks already exceeded the 6% range last month. This is the first time since the 2008 financial crisis that mortgage loan interest rates have surpassed 6% per annum.

This is interpreted as being due to the simultaneous rise in COFIX (Cost of Funds Index), which forms the basis for calculating variable mortgage loan interest rates. The COFIX for March this year, announced by the Korea Federation of Banks on the 15th, was 1.72%, up 0.02 percentage points from the previous month. It has risen by 0.17 percentage points since the beginning of this year. Reflecting this, banks have raised their interest rates.

Credit loan interest rates (grade 1, 1 year) currently range from 3.532% to 5.180%, entering the 5% range. This is an increase of up to 0.46 percentage points compared to the end of last year.

With inflation expected across the global economy, loan interest rates are forecasted to rise until the end of the year. The U.S. Federal Reserve (Fed) anticipates monetary tightening and inflation, and the Bank of Korea is also expected to continue its interest rate hike stance due to inflationary pressures. Experts predict that the Bank of Korea’s Monetary Policy Committee will raise the base interest rate twice more within the year, up to a maximum of 2.00%. This is the background for the possibility of mortgage loan interest rates reaching the 7% range. If mortgage loan interest rates hit the 7% range, it would be the first time in 13 years since 2009. Since COFIX was adopted as the mortgage loan interest rate benchmark in 2010, the highest rate recorded was in the 6% range.

However, there is also a view that banks will refrain from raising interest rates to expand loans, as household loan balances are decreasing. As of the end of last month, the household loan balances of the five major banks?Kookmin, Shinhan, Hana, Woori, and Nonghyup?have declined for three consecutive months. The household loan balance at the end of last month was 703.1937 trillion KRW, a decrease of 2.7436 trillion KRW compared to the previous month, significantly exceeding the previous decrease of just over 1 trillion KRW. Accordingly, there is an analysis that banks may engage in interest rate reduction competition to increase loan performance.

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