Bank Bonds Hit Another Yearly High... Rise in Mortgage Loans Inevitable

Financial Bonds 5-Year Yield Surpasses 4.4% for First Time in 11 Years
Fixed-Rate Mortgage Loan Interest Rates Continue to Rise
Pressure to Disclose Loan-Deposit Rate Spread Leads Banks to Raise Deposit Rates
Increase in KOFIX Causes Variable-Rate Mortgage Loan Rates to Also Rise Inevitably

The preferential safe conversion loan, which converts variable-rate mortgage loans to long-term fixed rates starting at an annual rate of 3.7%, began accepting applications on the 15th. On that day, a bank in downtown Seoul was quiet. Photo by Moon Honam munonam@

[Asia Economy Reporter Minwoo Lee] The benchmark bank bond yields for fixed-rate mortgage loan interest rates have been hitting record highs day after day this year. As banks respond by raising deposit interest rates under the loan-deposit interest rate spread disclosure system, the Cost of Funds Index (COFIX), which is linked to deposit rates, is also expected to rise. Since COFIX serves as the benchmark for variable-rate mortgage loan interest rates, an increase in mortgage loan rates is ultimately inevitable.

According to the Korea Financial Investment Association on the 21st, the 5-year financial bond (unsecured, AAA) yield recorded 4.416% the previous day, breaking its long-standing record high. Compared to 2.339% on January 3rd, it has nearly doubled. Since rising above 4% at the end of last month, it has been setting new yearly highs daily. The 5-year financial bond yield exceeding 4.4% is the first time in 11 years and 4 months since May 4, 2011 (4.40%).

Loan interest rates are also continuing their upward trend. As of today, the mixed-type (5-year fixed) mortgage loan interest rate range at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?is between 4.38% and 6.57%. Although the upper limit briefly rose to 7% in June, it dropped to the 5% range earlier this month following government criticism of excessive interest profits, but has since been rising again.

Variable-rate mortgage loan interest rates, which typically use COFIX as a benchmark, are also expected to increase. Banks are feeling pressure from the loan-deposit interest rate spread disclosure system and are responding by raising deposit rates. Since the mandatory monthly disclosure of the loan-deposit interest rate spread began last month, Shinhan Bank raised the interest rate of its representative time deposit product, ‘Shinhan S Dream,’ by 0.45 percentage points (p). KB Kookmin Bank also increased the interest rate of its ‘KB Star Time Deposit’ by 0.48 percentage points. NH Nonghyup Bank and Woori Bank are also attempting to narrow the loan-deposit interest rate spread by raising deposit interest rates.

This movement will eventually lead to a rise in COFIX with some delay. Since COFIX reflects the cost of funds raised by commercial banks, it rises as the interest rates on deposit products such as actual deposits, savings, and bank bonds increase. Given that the Bank of Korea is likely to continue raising the base interest rate steadily, this upward trend is expected to persist for the time being.

A financial industry official said, “Even with pressure from the loan-deposit interest rate spread disclosure, banks cannot continue business at a loss. While the interest rates on both deposit and loan products will rise, leading to a downward stabilization of the loan-deposit interest rate spread to a certain level, the increase in loan interest rates will inevitably translate into a burden on consumers.”

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