Interest Rate Cut? A Different World... Existing Loan Rates Highest in 10 Years

Atmosphere Still Unchanged on Feeling Interest Rate Drop

Only New Loan Rates Have Fallen
Outstanding Loan Rates Continue to Rise

Credit and Mortgage Loan Outstanding Rates Reach Highest in About 10 Years

[Image source=Yonhap News]

Interest rates for existing borrowers have reached their highest point in over a decade. While banks' loan interest rates have decreased, this only applies to new borrowers, making it seem like a different world for existing borrowers. Both credit loan and mortgage loan (Judaemdae) interest rates for existing borrowers continue to rise without showing signs of decline.

According to the Bank of Korea's Economic Statistics System on the 20th, the balance-based interest rates of domestic deposit banks continue to rise. Balance-based interest rates refer to the interest applicable to existing borrowers. As of March, the credit loan interest rate was 6.38%, marking the highest level since November 2013 (6.39%). The mortgage loan interest rate was 4.12%, the highest since September 2013 (4.13%).

Both loan interest rates have not fallen even once since hitting their lowest points in May 2021 and starting to rise thereafter until March of this year. During this period, credit loan rates increased by 3.17 percentage points (from 3.22% to 6.39%), and mortgage loan rates rose by 1.48 percentage points (from 2.64% to 4.12%).

This is in stark contrast to the rapidly declining interest rates applied to new borrowers taking out loans from banks. The credit loan interest rate based on new loan issuance peaked at 7.97% in December last year and dropped to 6.44% by March this year. Mortgage loan rates also rose to 4.82% in October last year before falling to 4.40%.

The trend of rising interest rates for existing borrowers means that many do not feel the effects of the rate decreases. A representative from a commercial bank said, "New borrowers would definitely notice a drop in interest rates if they consulted about loans now compared to earlier this year, but existing borrowers face their interest rate adjustment cycles sequentially, so it will take more time for them to feel the rate cuts." He added, "Since the amount of existing loans is much larger than new loans, most people still think interest rates are going up."

The rising delinquency rates are also largely influenced by the increasing interest rates for existing borrowers. According to the Financial Supervisory Service, as of February, the delinquency rate for credit loans was 0.64%, and for mortgage loans, it was 0.20%. These figures represent increases of 0.27 percentage points and 0.09 percentage points respectively compared to a year ago.

Although the Financial Services Commission and the Financial Supervisory Service are pressuring banks to lower loan interest rates, there are clear limits. Banks have only reduced rates for new borrowers. This has led to internal criticism within banks, calling it mere showmanship. To provide interest rate reduction benefits to existing borrowers, banks would need to adjust the additional interest rates, which is not an easy task. Moreover, since new loans are not as actively issued as before, the effect of rate reductions is expected to be limited.

A financial industry insider said, "To expect a proper effect from interest rate cuts, policies should include both new and existing borrowers, but no bank has ever done this. However, considering that many borrowers have chosen variable mortgage rates and the declining trend of COFIX, it is expected that interest rates for existing borrowers will also start to decline in the second half of this year."

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