Households face heavier interest costs from this month as banks are set to raise mortgage borrowing rates following the Bank of Korea’s (BOK) increase in the key short-term call rate last Thursday.
The interest rates for mortgage loans are expected to keep rising in the months to come as the central bank, in an apparent move to fight growing inflationary pressures, has signaled a further call rate hike.
The rate rise may pressure households to tighten their belts to cover rising interest costs. Banks expect the rise to decrease demand for new loans and thus help stabilize the volatile real estate market.
Last week, Woori Bank, a state-owned lender, raised borrowing rates for its housing collateral loans 0.23 percentage points to 5.29-6.59 percent, immediately after the BOK hiked its call rate by 25 basis points to 4.25 percent. That means a household borrowing 100 million won from Woori should pay 230,000 won more interest annually.
Hana Bank, the country’s fourth-largest lender, also slightly increased its mortgage loan rates. The bank said it plans to raise mortgage loan rates for those owning apartments in volatile areas by 0.5 percentage points, making it clear it will take stronger action to help curb real estate speculation.
Other banks, such as Kookmin and Shinhan, will follow Woori and Hana to increase mortgage loan rates from today.
Banks tend to link mortgage loan rates to the rates of certificates of deposit (CDs). CD rates have risen steadily as the central bank has tightened its monetary policy since late last year, but banks have cut mortgage loan rates to draw more loan-seekers.
``The government’s real estate policymakers see the banks’ mortgage loan policies as fueling property demand and helping destabilize the market,’’ a BOK official said. ``Cooling down the property market has been the top priority of the government’s real estate policy, but banks refused to follow by maintaining low interest rates for mortgage loans.’’
But the situation is a lot different now. If banks raise mortgage loan rates, policymakers believe demand for loans will fall, and this will ultimately help ease the property bubble. However, market watchers point out the rate hikes will give households a greater financial burden and will thus negatively affect the reviving household spending.
According to Barclays Capital, growing household debt has spurred domestic consumption in South Korea. However, as banks are tightening lending policies for mortgage loans, consumer spending may fall, negatively affecting the country’s economic growth, the bank said.
During a meeting with bank CEOs on May 19, BOK Governor Lee Seong-tae said the government’s tighter anti-speculation measures, in place since March 30, are now affecting the borrowing patterns of housing loan seekers. Demand for mortgage loans has remained strong, but the measures will slow the pace of their growth.
Affected by the government’s real estate policy, commercial banks are instead focusing more on corporate client loans. Most banks plan to expand loans to small and medium-sized enterprises (SMEs) in a bid to diversify their income sources.
Source: Korea Times
