By Na Jeong-ju
Staff Reporter
The interest rates on home-backed loans are rising sharply adding interest payment burdens on borrowers, raising fears of a U.S.-like credit squeeze amid sluggish home sales and growing liquidity problems for small builders.
Kookmin Bank, the country's largest lender, said Tuesday it raised interest rates on variable-rate housing loans by 0.09 percentage points from a week ago. Its annual rates ranged from 6.02 to 7.62 percent.
It is the first time in a month that the minimum rate at Kookmin has risen above 6 percent. For the past month, the rate jumped by 0.2 percentage points, meaning that those who borrowed 100 million won ($102,000) from Kookmin must shoulder an additional interest payment of 200,000 won ($204) annually.
Bank officials expect mortgage rates to continue to rise in the weeks to come, reflecting rising money market rates.
According to the Bank of Korea (BOK), a 1 percentage point interest rise will increase total household interest costs by 2.6 trillion won a year.
BOK data shows more than 90 percent of bank loans are variable-rate, tied to the ups and downs of the interest rates on certificates of deposit (CDs). In the face of dwindling consumer deposits, banks issued more bonds and CDs late last year to raise funds, prompting a sharp increase in borrowing rates.
``The rising interest burden on borrowers not only raises credit default risks for households and corporations but also makes it more difficult for financial firms to raise the necessary funds for their businesses,'' the Korea Institute of Finance said in a recent report.
The data came as a growing number of institutes are raising concerns about rising credit default risks.
Earlier this week, Hyundai Research Institute (HRI), a Seoul-based think tank, said the country may suffer a property bubble burst like the United States if sluggish home sales continue amid an economic downturn.
``A fall in the value of property will cause a rise in debt default rates, negatively affecting construction firms and lending institutions,'' the institute said.
Household loans fell for the first time in a year in January as banks toughened lending rules for households amid a sluggish housing market and deepening concerns over a global credit squeeze.
Outstanding household loans fell 487 billion won, or 0.1 percent, from a month ago to 473.6 trillion won in January, marking the first decline since January of last year when the amount dropped by 1.2 trillion won.
The decrease in household loans in January reflected a weaker demand for home-backed loans and tougher credit rules by institutions, according to the Bank of Korea.
However, many analysts caution that if the housing market remains stagnant, many builders, particularly smaller ones based in provincial areas, could go bankrupt. As a result, savings banks, credit cooperatives and other non-banking institutions face increasing risks of insolvency, they say.