Starting next month, a new regulation will prevent banks from passing on certain costs to borrowers in their mortgage interest rates. However, experts predict that borrowers may not see significant changes in their interest burdens. While legal costs will be excluded, banks are expected to offset any potential rate reductions through adjustments in their margins and reductions in preferential rates for household loans.
The Financial Services Commission announced on June 28 that a revised Banking Act will take effect on July 1, prohibiting banks from transferring costs such as reserve requirements and deposit insurance premiums to borrowers. Previously, banks included these costs in their margin calculations for setting loan interest rates. The government anticipates that the new rules could lead to a maximum interest rate reduction of 0.21 percentage points, depending on the product.
Despite this potential reduction, many believe that borrowers will find it challenging to feel the benefits. Banks have been managing various legal costs as a single margin item, and recently, they have been reducing preferential rates and adjusting margins to strengthen household loan management.
Currently, Woori Bank has eliminated its preferential rates for mortgage loans. IBK Industrial Bank and NH Nonghyup Bank have also reduced their preferential rates and increased their margins.
Additionally, KB Kookmin Bank and NH Nonghyup Bank have restricted access to credit insurance and guarantee products, which supplement mortgage limits, effectively lowering the amount borrowers can secure against the same collateral. Even if some factors for interest rate reduction arise from the exclusion of legal costs, the simultaneous tightening of interest rates and limits by banks may limit the relief borrowers experience.
There are concerns that the government's intervention in interest rates may intensify. Banks will be required to incorporate compliance with these new rules into their internal control standards at least twice a year. If financial authorities determine that banks are not fulfilling their obligations regarding loan interest rate management, they could face penalties for inadequate internal controls.
A financial industry official stated, "While the revised enforcement decree changes how legal costs are reflected in interest rates, banks must also consider the overall management of household loan volumes and soundness. If interest rates are not accurately reflected, banks may resort to more conservative measures, such as tightening loan assessments or reducing lending to low-credit and low-income borrowers."
* This article has been translated by AI.
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