Record-low interest rate to push down mortgage rate

People seeking to take out loans stand in front of a teller at a branch of Shinhan Bank in Seoul, May 18. Korea Times file

By Lee Kyung-min

Borrowing costs for households including mortgages will decrease starting today following a record-low key base interest rate set by the central bank.

The Bank of Korea (BOK) lowered its benchmark rate by a quarter percentage point to a record low of 0.50 percent, May 28 and after the decision, the central bank said the country's economy will contract 0.2 percent in 2020.

The already low 2-percent borrowing rate could fall to as low as 1.85 percent, a level set by the government in 2019 to help borrowers switch their adjustable-rate loans to lower fixed-rate ones following a steady decline in the key base rate over the past few years.

The adjustable rate that tracks the Cost of Funds Index (COFIX) will drop in stages, following decline in interest on savings account. The level of decrease depends on when the borrowing request was granted.

The benchmark lending rate for mortgages, COFIX is widely used to determine lending rates here, and is measured by calculating the weighted average of interest rates and the balance of eight commercial banks' major financial products including regular installment savings, household savings, mutual funds, certificates of deposits (CD) and repurchase agreements (RPs).

The expected COFIX rate as of June 1 of the top five commercial banks ― KB Kookmin, Shinhan, Woori, Hana and NongHyup ― stands between 2.22 percent and 4.09 percent.

Unlike those who can borrow at a lower cost, those whose major source of income has been from deposit-generated interest will find their earnings lowered by the cut in the base rate.

Lower than 1 percent interest means a person who deposits 50 million won ($40,300) receives less than 500,000 won, per year.

For context, commercial banks offered around the mid-7-percent level in annual interest from early 2000, providing a reasonable return even after paying 20 percent tax on interest income.

The deposit rate had dropped from the low-10 percent level in the 1990s, but was still a considerable source of income for depositors.

Some regional banks have cut the deposit rate to a range of between 0.1 percentage point and 0.35 percentage points. Leading commercial banks are likely to follow suit this week, with the rate to slide to as low as 0.7 percent.

The central bank's 50-basis-point cut in March led to a deposit rate drop of between 0.1 and 0.4 percentage points.

Meanwhile, those who had already taken out loans will not see a drop in their interest payments because banks pre-emptively reduced or removed benefits, reflective of the market consensus that the central bank would cut the key rate amid the pandemic.