By Lee Hyo-sik
Staff Reporter
``An interest bomb'' is being dropped on households who took out loans to purchase houses with rates surging to an all-time high of 10 percent as a result of the tightening of purse strings by domestic banks spooked by the global credit crunch.
Some analysts are cautioning that soaring mortgage rates could force borrowers to default on interest payments en masse and worsen banks' balance sheets, calling on the Bank of Korea (BOK) to slash its base rate to help curb the further rate increase.
Families here have tightened their purse strings this year against rising consumer prices and slowing income growth. Now, they are facing a greater financial burden as they are saddled with skyrocketing home loan interest payments. Some homeowners are choosing to put their homes up for sale but it is hard to find a buyer amid a real estate market slump.
A 3-year fixed-rate mortgage offered by Shinhan Bank increased to 8.4 and 10 percent last Thursday, reaching the 10 percent mark for the first time. Rates are projected to continue to show an upward curve for the foreseeable future as banks are facing increasing difficulties in raising funds at home and abroad. Investors and companies prefer to hold cash rather than invest in bonds, stocks and other riskier assets on the deepening global credit woes.
The nation's largest Kookmin Bank also raised the interest on fixed rate mortgages by over 0.1 percentage point last week from a week earlier, with the maximum rate set at 9.81 percent. Woori Bank hiked the rate by 0.21 percentage points to between 8.64 and 9.74 percent over the one-week period.
Most homeowners get loans not on these fixed rates but on floating rates. It doesn't mean, however, that they are okay because floating rates have also increased at a rapid pace over the past month.
The CD rate, the basis for floating rate mortgages, recorded 5.88 percent last Thursday, the highest level since January as a result of a deepening liquidity shortage, pushing up interest rates on floating rate loans.
Korea Exchange Bank raised the rate by 0.23 percentage points to 6.99 and 8.27 percent last week from a week earlier. Other banks also followed suit, with the minimum rate hovering over 6.65 percent.
Despite soaring interest rates, the amount of home-baked loans continues to grow this year, indicating that borrowers are increasingly shouldering a greater interest payment burden. Mortgages extended by six commercial lenders totaled 177 trillion won as of September, up 11.8 trillion won from December.
The tighter credit conditions are also forcing banks to raise rates on loans extended to salaried workers without collateral. Citibank hiked a rate on a 2-year credit-based loan for salaried employees by 0.7 percentage points to 11.7 percent over the past week. Other lenders did the same, putting the minimum rate at 7.76 percent.
``The worldwide credit crunch will worsen toward the year's end and the situation will not likely improve next year. Rising interest rates will put a heavier financial burden on borrowers, which could worsen the financial market soundness as well as further dampen sluggish private consumption and corporate investment,'' Samsung Economic Research Institute economist Jeon Hyo-chan said.
He called on the central bank to ease its monetary policy by reducing the base interest rate or injecting more liquidity into the market.