Mortgage Loan Rates Soar
By Na Jeong-ju
Staff Reporter
Banks have raised interest rates charged on home-backed loans over the past six weeks, reflecting a surge in money market rates, fueling concerns about mortgage defaults amid sluggish demand for homes.
The average interest rate on mortgages has risen by 0.52 percentage point since early November. This means a household that had borrowed 200 million won in mortgages should shoulder an additional interest payment of some one million won ($1,080) annually.
Despite rises in mortgage rates, banks have increased loans to homeowners. The outstanding mortgages at the country's top five banks ― Kookmin, Woori, Shinhan, Hana and Nonghyup ― stood at 176.7 trillion won as of Dec. 20, up 1.17 trillion won from the end of November.
Since early October, money market rates have been rising fast as banks have issued more bonds and certificates of deposit (CDs), to which variable-rate loans are tied, to raise funds for loans. More issues of such fund-raising tools against weaker demands are boosting interest rates on mortgages.
An outflow of funds from banks' deposit accounts and a steep rise in issuance of bonds and CDs by banks have caused a surge in money market rates, according to analysts. The situation may become worse in the coming months as banks have no other choice but to issue more bonds and CDs to ease fund shortage problems.
``Interest rises will have greater impact on the financial market than we imagined, if they rise too fast for a short period of time,'' said Ha Joon-kyung, a research fellow at the Korea Institute of Finance. ``Banks need to strengthen lending rules to cut demand for mortgages, while making efforts to ease upward pressure on interest rates.''
Analysts worry that mortgage delinquency rates at banks and other lending institutions may soar if households and firms fail to service their debts amid rising interest rates.
According to the Korea Securities Dealers Association, banks' bonds that are scheduled to mature in the January-June period next year are estimated at 49.47 trillion won, up 43 percent from the same period of this year. The figure is three times larger than the government-issued bonds awaiting liquidation in the first half.
In January alone, banks will have to pay 10.7 trillion won to buy back bonds, up from 6.2 trillion won in November and 7.1 trillion won in December.
In the face of dwindling consumer deposits, banks may move to issue more bonds to secure enough funds to resolve maturing bonds, the association said.
According to the Ministry of Construction and Transportation, a total of 100,887 newly-built houses were left unsold as of the end of October, which is the highest level since September 1995. The ministry forecast the figure will rise further as more people are reluctant to buy houses with loans.