"Base Interest Rate Has Fallen, But What About My Loan Rate?"... The Key Is the Additional Interest Rate

As the Bank of Korea lowered the base interest rate by 0.25 percentage points for the first time in three months, attention is focused on the reduction of household loan interest rates by commercial banks. This is because the benchmark interest rates (such as COFIX or corporate bonds) that make up loan interest rates are influenced by the base rate. However, since the base rate cut was already anticipated, the decline in benchmark interest rates may be limited. Moreover, banks artificially raised the spread last year to manage the total household debt. This is why it is pointed out that lowering the spread will be key to actually feeling the effect of the base rate cut.

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According to the financial sector on the 27th, following the Bank of Korea's Monetary Policy Committee decision to cut the base rate on the 25th, the possibility of a decline in loan interest rates, including mortgage loans, has increased.

Generally, household loan interest rates are determined by adding a spread to benchmark rates such as COFIX or 5-year corporate bonds and then subtracting preferential rates. While the spread and preferential rates are largely at the discretion of banks, benchmark rates move in tandem with the base rate. Therefore, a decision to cut the base rate leads to a decline in benchmark rates, which can ultimately lower loan interest rates.

However, the financial sector expects the effect of the base rate cut on lowering loan interest rates to be limited. A representative from a commercial bank said, "The time lag for the base rate to be reflected in loan interest rates varies. Especially when the Bank of Korea's rate decision is certain, rates often move in advance before the announcement." He added, "In this case, since the step was expected, the decline has already been reflected in COFIX and corporate bond rates."

In fact, according to COFIX (based on new contracts) published by the Korea Federation of Banks, despite the base rate being held steady for the past two months, COFIX fell from 3.37% in November last year to 3.08% in February this year. According to the Korea Financial Investment Association, the 5-year AAA corporate bond rate also dropped from 3.089% at the end of December last year to 2.97% in February. The Bank of Korea also analyzed that the two consecutive base rate cuts in October and November last year were pre-reflected in the market since May last year. This means the decline in loan interest rates due to the base rate cut is limited.

Although benchmark rates have continuously declined, financial consumers have not felt the effect of the base rate cut, which is ultimately attributed to the spread. Banks artificially raised the spread last year to suppress loan demand under government pressure to manage the total household debt.

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Because of this, an inversion phenomenon occurred where the spread on new mortgage loans (installment repayment method) was higher than the benchmark rate. According to the Korea Federation of Banks' disclosure, NH Nonghyup Bank's spread surpassed the benchmark rate from September last year, and as of January this year, KB Kookmin, Hana, and Woori Banks also experienced this inversion. Despite the Bank of Korea lowering the base rate by 0.75 percentage points over four months and market rates falling, the main reason for the slow perception of the effect was this.

Banks are reconsidering lowering the spread. First, the household debt-to-GDP ratio fell to the low 90% range last year, reducing government pressure to manage total household debt. Currently, financial authorities are criticizing that the market perception effect of the base rate cut is weak.

The most proactive bank is Woori Bank. Earlier this month, Woori Bank lowered the spread on variable-rate apartment mortgage loans (based on COFIX) by 0.2 percentage points, and from the 28th, it will also reduce the spread on periodic mortgage loans (based on 5-year corporate bonds) by 0.25 percentage points. On the 21st, it also expanded the maximum preferential rate on mortgage loans by up to 0.3 percentage points. Shinhan Bank lowered the 5-year fixed mortgage loan rate by 0.1 percentage points in January and is reviewing additional cuts.

A representative from a commercial bank said, "The spread that was artificially raised last year is expected to be partially adjusted," adding, "Considering the concentration of loans, it is highly likely that commercial banks will follow suit."

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