Second Financial Sector Mortgage Rates Rise Faster Than Banks

Mortgage rates for the second financial sector, including savings banks, rose significantly in July compared to traditional banks. As banks maintain high thresholds for mortgage loans, there are concerns that borrowers shifting to the second financial sector may face increased interest burdens.

According to data from the Bank of Korea's economic statistics system, the mortgage rate for new loans at savings banks was 5.20% in July, up 0.44 percentage points from 4.76% the previous month. The mortgage rate for mutual finance institutions, including NongHyup, Saemaul Geumgo, and credit unions, also increased from 4.42% to 4.77%, a rise of 0.35 percentage points.

In contrast, the mortgage rate for new loans at deposit banks only increased from 4.36% to 4.48%, a modest rise of 0.12 percentage points. This means the increase in savings bank rates was approximately 3.7 times that of banks, widening the gap between the two to 0.72 percentage points.

The sharp rise in mortgage rates in the second financial sector is attributed to increased funding costs and higher risk premiums reflecting borrowers' creditworthiness. Notably, savings banks rely heavily on short-term deposit products for funding, meaning that rising base rates can lead to increased deposit rates, further elevating their funding burdens.

Other household loan rates also saw increases. In July, the household loan rate at savings banks rose by 0.63 percentage points to 13.43%, the highest level since March of the previous year. The general loan rate at Saemaul Geumgo increased by 0.48 percentage points to 5.15%, while credit unions saw a 0.14 percentage point rise to 5.16%, both marking their highest levels this year.

The issue is that borrowers who find it difficult to secure loans from banks may be pushed into the second financial sector, where they will face higher rates. Although financial authorities recently raised the total household loan management targets, the lending limits and assessment criteria at banks remain stringent.

According to the domestic loan comparison and brokerage platform Finda, the number of borrowers with credit scores above 900 who secured loans from the second financial sector in the second quarter of this year rose to 831, a 20% increase from 693 in the first quarter. Additionally, the number of inquiries regarding loan limits from high-credit borrowers in the 900 range increased by 28,573 compared to June.

Industry experts warn that if the trend of rising rates continues, it could not only increase the repayment burden on borrowers but also pose risks to the stability of the second financial sector. Kim Dae-jong, a professor at Sejong University, stated, "Savings banks and mutual finance institutions have a higher proportion of loans to vulnerable borrowers, self-employed individuals, and real estate-related loans compared to banks, which could lead to rising delinquency rates and an increase in non-performing loans. It is essential to adopt conservative measures, such as proactive reserve accumulation, to prepare for prolonged high-interest rates and delayed economic recovery."