Why are mortgage loan rates rising despite key rate freeze?

By Yi Whan-woo

Commercial banks are hiking the costs associated with taking out a mortgage even while the benchmark interest rate has remained steady for more than half a year, in their bid to cover expenses needed to counter growing liquidity risks.

Many home buyers in return face a growing burden for repayment, as they borrowed money from banks on a floating rate.

According to industry sources, Wednesday, the latest mortgage rates offered by five major lenders ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― were in a range of 4.35 percent to 6.97 percent.

The rates are comparable to those in early February, when they fell between 4.98 percent and 6.89 percent, following the Bank of Korea's (BOK) 25-basis-point rate hike delivered on Jan. 13.

The BOK's policy rate was hiked to 3.5 percent at that time and has been kept unchanged to date.

“The upper range of the mortgage loan rate is getting closer to 7 percent, putting pressure on borrowers in paying back principal and interest,” a source said.

Another source explained that the higher mortgage loan rates are attributable to the higher costs of financing money to secure liquidity as demanded by the financial regulator.

The government asks lenders to keep their liquidity coverage ratio (LCR), the minimum amount of highly liquid assets that financial institutions are required to hold in accordance with international regulations, at 95 percent until December, up from 92.5 percent in June.

The purpose of the LCR is to ensure financial institutions can cope with market-wide shocks and be ready to possess suitable capital preservation to ride out any short-term liquidity disruptions.

The higher LCR comes after a series of liquidity risks concerning the banking services sector in and outside the country this year, namely the collapses of Silicon Valley Bank and Credit Suisse and the excessive default rate observed at MG Community Credit Cooperatives.

In particular, major commercial banks this month were asked to prepare around $4 billion in financing to support MG Community Credit Cooperatives which has been hit by massive customer withdrawals.

Under the circumstances, the yields on five-year bonds of banks with AAA credit ratings inched up from 3.941 percent to 4.204 percent between April and July 17.

During the same period, the yields on the firms' 10-year bonds advanced from 3.616 percent to 3.863 percent.

Correspondingly, the Cost of Funding Index (COFIX), which refers to roughly average funding cost of debts among eight banks, stood at 3.7 percent in June, up 0.14 percentage points from the previous month, according to the Korea Federation of Banks (KFB).

The eight consist of the aforementioned five lenders plus Standard Chartered Bank Korea, Citibank Korea and the Industrial Bank of Korea (IBK).