Households’ Interest Burden Surges
By Na Jeong-ju
Staff Reporter
Banks have raised their interest rates on fixed-rate mortgages, reflecting a rise in interest rates on bonds, which are used by banks to set borrowing rates for fresh fixed-rate loans.
The average interest rate on 3-year bank-issued bonds stood at 6.65 percent as of Wednesday, rising 1.5 percentage points from the end of last year.
This means those who borrow 100 million won in fixed-rate mortgages, should now bear an additional 1.5 million won ($1,600) in annual interest payment than those who received the same amount of loans late last year.
During the same period, the average rate on 91-day certificates of deposit (CDs) ― to which floating-rate loans are tied, rose by 0.80 percentage points, creating some 800,000 won more interest burden on borrowers.
Borrowers of mortgages at Woori Bank on fixed-rate contracts now have to shoulder an interest rate of 7.56-9.06 percent. It marks a 1.44 percentage point gain from the end of 2006. Fixed-rate mortgage rates are expected to continue rising at other banks.
Borrowers usually choose fixed-rate loans over floating-rate loans to avoid risks of interest rises, even though higher interest rates are charged on fixed-rate loans. However, as bond rates have risen faster than CD rates for the past few months, fixed-rate loan borrowers have suffered greater burdens on interest payments.
Banks have issued more bonds and CDs in recent months to raise funds amid decreasing consumer deposits, prompting a rise in interest rates on the instruments.
As of the end of October, the country had some 220 trillion won in outstanding mortgage loans. Of them, variable-rate loans account for about 95 percent, with the remainder being fixed-rate loans.
Despite the rise in interest costs, banks have increased home-backed loans. As of Nov. 22, the country's six largest lenders ― Kookmin, Woori, Shinhan, Hana, Korea Exchange and Industrial Bank of Korea ― had 163.7 trillion won in outstanding mortgage loans, up 1.06 trillion won from a month ago.
Analysts forecast CD and bond rates will rise for the time being unless banks see a significant improvement in their deposit balance. As more depositors have taken their money out of banks to invest in stocks, banks have suffered an erosion of deposits.