Rate hike expected to push loan rates higher
Bank credit loan rates could reach 7% per year
Borrowers with 450 million won mortgage face 250,000 won more per month if rate hits 8%
The Bank of Korea's Monetary Policy Board raised the benchmark interest rate for the second consecutive month Thursday, accelerating its monetary tightening and setting the stage for a sharp rise in bank lending rates. Markets expect fixed-rate mortgage rates at major banks to surpass 8 percent annually in the current rate-hike cycle. Financial regulators have also ordered banks to rein in aggressive marketing as part of household loan volume management, deepening concerns for borrowers already grappling with rising interest costs.
The Monetary Policy Board raised the benchmark interest rate by 0.25 percentage points Thursday, lifting it from 2.75 percent to 3.00 percent annually. The move marks the second consecutive rate increase, following the board's decision on July 16.
The Bank of Korea emphasized the importance of combating inflation and left the door open to further hikes. In its conditional rate outlook released Thursday — showing where board members expect rates to stand in six months — 10 of the 21 dots were placed at 3.25 percent and six at 3.50 percent, suggesting the benchmark rate could climb as high as 3.50 percent in the current cycle.
Bank lending rates are expected to follow an upward trajectory as a result. Fixed-rate mortgages use the five-year bank bond yield as a reference rate, while credit loans use the six-month bank bond yield. Variable-rate mortgage reference rates are also linked to the COFIX index. All are influenced by the direction of the Bank of Korea's benchmark rate.
According to the Korea Financial Investment Association's bond information center, the five-year bank bond yield (average of credit rating agencies) climbed from 4.343 percent at the end of July to 4.430 percent on Tuesday, driven by rising long-term US Treasury yields, before easing to 4.388 percent on Wednesday. With the Bank of Korea keeping the door open to additional hikes, bank bond yields are expected to rise again.
The fixed-rate mortgage rates at the five major banks — KB, Shinhan, Hana, Woori and NH — stood at 4.72 to 7.17 percent annually on Thursday, rebounding after the upper end dipped to 7.16 percent on Thursday of last week.
Markets widely expect fixed-rate mortgage rates to comfortably exceed 8 percent annually if the Bank of Korea raises the benchmark rate to 3.50 percent. The six-month variable credit loan rates at the five major banks stood at 4.74 to 5.94 percent annually on Thursday, with analysts projecting those rates could approach 7 percent as well.
For example, a borrower taking out 450 million won ($325,000) at an annual rate of 8 percent on a 30-year equal principal-and-interest repayment plan would pay about 3.3 million won per month — roughly 250,000 won more than if the loan were taken at 7.17 percent, the current upper end of the five major banks' lending rates.
Financial regulators' household lending restrictions are expected to make the interest burden feel heavier than usual for borrowers. Banks typically ease that burden through preferential rates offered as part of their marketing. However, since regulators recently granted banks additional lending quotas while ordering them to "refrain from excessive competition," banks are unlikely to run separate rate-reduction marketing campaigns.
"The regulator's message is that the additional lending quota should be directed primarily toward mid-rate loans for vulnerable groups and genuine housing needs among young people," an official at a major commercial bank said. "We will maintain a management-oriented approach for all loans other than group loans and low-income loans."
hyuk@heraldcorp.com
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