High-Flying Financial Bonds... Loan Interest Rates Expected to Surge Again

5-Year Financial Bonds at 4.295%... Highest in 11 Years
Mortgage Loan Rates Resume Upward Trend After Pause

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As the financial bond yields, which serve as the benchmark for loan interest rates, soar again, the funding costs for banks are increasing. With the base interest rate expected to continue rising, it is inevitable that financial consumers will face a heavier burden of loan interest for the time being.

According to the Korea Financial Investment Association on the 1st, the 5-year financial bond yield (unsecured, AAA), which is the basis for calculating mixed mortgage loan rates, recorded 4.295% as of the 31st. This is the highest level since August 2, 2011. It is 0.148 percentage points (p) higher than the previous peak of 4.147% (June 17). After reaching the previous peak, the financial authorities warned banks against ‘interest profiteering,’ leading to a somewhat stable trend, but recently it has started to rise sharply again.

In particular, the Bank of Korea’s Monetary Policy Committee’s decision to raise the base interest rate again on the 25th of last month acted as a catalyst. The yield was in the 3% range on the 22nd (3.828%), 23rd (3.835%), and 24th (3.919%), but immediately after the base rate hike announcement, it surged by 0.2 p to enter the 4% range.

The 1-year financial bond yield (unsecured, AAA), which is used as a benchmark for calculating unsecured loan interest rates, showed a similar trend. It recorded 3.769% on the 31st of last month, the highest in 11 years since August 5, 2011 (3.79%). Although it stayed in the 3.4% range earlier this month, it began rising again around the time of the Bank of Korea’s base rate hike announcement.

Since financial bonds are issued by banks to raise loan funds, a sharp increase in funding costs inevitably leads to higher loan interest rates. While banks, conscious of criticism over interest profiteering due to the introduction of the loan-deposit interest rate spread disclosure system, have tried to restrain loan rate hikes and instead raised deposit interest rates, they can no longer withstand the rising ‘cost’ of loans.

Loan interest rates have already started rising again. As of this date, the mixed (5-year fixed) mortgage loan interest rate range at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?is 4.17% to 6.44%. After the upper limit of interest rates rose to 7% in June and then dropped to the 5% range earlier this month following regulatory pressure, it has climbed back to the mid-6% range.

The upward trend in interest rates is expected to continue for the time being. With the Bank of Korea likely to keep raising the base rate until the end of the year, and Jerome Powell, Chair of the U.S. Federal Reserve, signaling strong tightening intentions, the Fed is increasingly likely to take another ‘giant step’ (a 0.75 p increase in the base rate at once) this month, forcing the Bank of Korea to respond accordingly. This has raised concerns that the magnitude of South Korea’s base rate hikes could be larger than expected. Consequently, some forecasts even suggest that the upper limit of mortgage loan rates could reach the 8% range by year-end. A representative from a commercial bank explained, “Banks have already implemented several rate cuts under regulatory pressure,” adding, “With the base rate continuing to rise, there is little room left to further reduce rates.”

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