Mortgage Blues Hit Borrowers
By Lee Hyo-sik
Staff Reporter
A 39 year-old salaried worker, who wanted to be identified by only his last name Roh, said he has more to worry about than celebrate the upcoming Christmas and the year-end holiday season. He has not been able to sleep well at night as mortgage rates have increased sharply over the past months.
He bought a 900 million won apartment in the affluent Gangnam district, southern Seoul, late last year on expectations of price increase by taking out a 300 million won home-backed loan from a bank at an annual interest rate of 5.8 percent. But with the recent rate hike to 6.8 percent, he now has to pay 20.4 million won in interests per year, up from the previous 17.4 million won.
``Now, I have to pay 3 million won more in annual interest payments for my mortgage. But a more depressing thing is I will probably have to pay even higher interests in the coming months as rates are expected to go up further on liquidity shortage in the market and rising consumer prices,'' Roh said.
He said his family is planning to cut down spending on cultural and other leisure activities to pay for the higher interest payments. ``To make matters worse, apartment prices have remained flat over the past year because of the government's heavy-handed regulations on the housing market. But I still have to pay millions of won in the comprehensive real estate tax by next week.''
The progressive property tax, first levied in 2005, applies a higher progressive tax rate on owners of homes worth more than 600 million won under the government-assessed price standard, to curb demand for luxurious apartments, especially in southern Seoul, and stabilize rises in property prices. Those holding land worth more than 300 million are also subject to the tax.
This year, the number of individuals and businesses subject to the tax rose 38 percent to 486,000 from a year earlier on steep gains in home prices last year. Also, the tax was estimated to have raised 2.86 trillion won, up 65 percent.
Like Roh, many salaried workers and self-employed took out loans from banks to purchase houses last year amid the booming real estate market. But the market was sluggish this year due to a series of state real estate regulations. Now mortgage borrowers are required to pay higher interest payments.
Housing loan rates have increased sharply this year as local lenders have been issuing more certificates of deposits (CDs) to raise funds for loans as a growing number of people are taking money out of accounts at banks to invest in equities over the past year amid the recent bullish market run.
With more CDs on the money market against weak demand, CD rates _ the benchmark for variable-rate housing loans _ have increased and pushed up interest rates on mortgages and other loans, putting heavier financial burden on households.
Also, on top of the ongoing U.S. subprime loan crisis, banks' aggressive lending to households and businesses has also raised mortgage rates.
As of the end of October, the country had some 220 trillion won in outstanding mortgages. Of them, variable-rate loans account for about 94 percent, with the remainder being fixed-rate loans. Kookmin Bank, Korea's largest retail lender, is now charging average 7.84 percent on its floating-rate housing loans, up from 7.05 percent early this year.
Many borrowers have tried to switch to fixed-rate loans from floating-rate loans to avoid risks of interest rises. But bond rates have risen faster than CD rates for the past few months, forcing new fixed-rate loan borrowers to shoulder greater burdens on interest payments.
Some banks fixed mortgage rates at over 9 percent, affected by rising long-term bond yields.
Bank officials project housing loan rates will continue to head upward toward the year's end and next year. They say the shift of money from banking accounts to brokerages' cash management accounts (CMAs), as well as rising investment in stocks and other financial products for higher returns will force lenders to issue more CDs, hiking rates and placing a heavier interest rate burden on borrowers.
They also said lenders will issue CDs at a faster pace for the remainder of the year because the introduction of Basel II, an international accord to set up more rigorous risk management requirements in the banking sector, will likely make it more difficult for them to raise funds next year.