According to the financial sector on the 13th, fixed-rate (five-year) mortgage rates at the five major commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at 4.16% to 6.76% a year, with the top end nearing 7%. The upper bound briefly exceeded 7% as of March 27 after the benchmark five-year bank bond yield (AAA) surged on fallout from the Middle East situation.
Deposit rates, however, have remained in the 2% to 3% range, widening the spread. Disclosures from the Korea Federation of Banks show the headline rates on the five banks’ flagship 12-month time deposits at 2.85% to 3.10% a year. Base rates, excluding preferential rates, were in the low 2% range.
Loan rates tend to move faster than deposit rates because they are set off market benchmarks. Banks typically calculate lending rates by adding a spread to a base rate that reflects indicators such as the Bank of Korea’s policy rate and COFIX (the cost of funds index), then subtracting discounts. Data from the Korea Financial Investment Association show the five-year unsecured AAA bank bond yield rose from 3.57% at the end of February to 4.05% at the end of last month, up nearly 0.5 percentage point.
A recent government move to tighten oversight of high-value mortgages by revising contribution rates to the Korea Housing Finance Credit Guarantee Fund has also added upward pressure, as differentiated rates apply to larger loans.
Deposit rates that had topped 4% under the high-rate environment fell into the 2% range early this year and have not rebounded. Analysts say tighter household lending rules have curbed loan demand, reducing banks’ need to raise funding and weakening incentives to lift deposit rates.
Market watchers expect the widening spread to persist for now. If market rates keep rising while banks maintain a focus on managing household lending, lenders are likely to keep loan rates elevated. The Bank of Korea has held its policy rate at 2.5% for seven straight meetings, but expectations of a rate hike later this year continue to circulate, also supporting higher loan rates.
The concern is that a wider spread translates directly into heavier interest burdens for borrowers. The Bank of Korea said variable-rate loans accounted for 28.9% of outstanding mortgages as of the end of February, the highest level in three years and seven months.
As rates rise, more borrowers are falling behind. A Financial Supervisory Service survey found the delinquency rate on banks’ household loans was 0.42% at the end of January, up 0.04 percentage point from a month earlier. Mortgage delinquencies rose 0.02 percentage point to 0.29%.
A financial industry official said uncertainty has not fully eased and some analyses suggest central banks at home and abroad could begin raising policy rates in the second half even if they do not move immediately. The official added that market rates feed quickly into loan rates while deposit rates tend to follow later, making the widening spread difficult to reverse soon.
* This article has been translated by AI.
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