[Financial Essay] Low Interest Rates Stimulate Demand for Housing Loans

Increased Demand for Mortgage Loans Due to Low Interest Rates
Bank of Korea Holds Base Rate at 1.25%
Low Interest Rate Trend Continues This Year

[Asia Economy Reporter Kim Min-young] Mortgage loan interest rates continue to stay at their lowest levels. Although the government is tightening loan demand by cracking down on housing prices, borrowers' desire for loans is unlikely to decrease easily due to low interest rates.

According to the financial sector on the 19th, as the COFIX (Cost of Funds Index) declined, major banks such as Shinhan, KB Kookmin, Woori, and NH Nonghyup Bank collectively lowered the new outstanding balance-based COFIX-linked variable mortgage loan interest rates, effective from the 16th, by 0.06 percentage points compared to the previous month. This marks the sixth consecutive month of decline.

Shinhan Bank's new outstanding balance-based COFIX-linked mortgage loan interest rates were found to be 2.83?4.49%, Kookmin Bank 2.85?4.35%, Woori Bank 2.89?3.89%, and Nonghyup Bank 2.63?4.24%.

The COFIX-linked interest rates based on new loan amounts also fell by 0.03 percentage points. Shinhan Bank recorded 2.86?4.52%, Kookmin Bank 2.81?4.31%, Woori Bank 3.00?4.00%, and Nonghyup Bank 2.74?4.35%.

KEB Hana Bank, which bases its rates on 6-month financial bonds, applies variable mortgage loan interest rates of 3.081?4.381% based on the new outstanding balance and 3.341?4.641% based on new loan amounts.

The four major banks excluding Hana Bank lowered their variable mortgage loan interest rates due to the decline in December's COFIX announced earlier by the Banks Association.

COFIX is the weighted average of interest rates on deposit products raised by eight domestic banks, including fixed deposits, installment savings, mutual installment savings, and housing installment savings. It serves as the benchmark for variable-rate mortgage loans handled by banks.

On the 15th, the Banks Association announced that December's COFIX based on new outstanding balances was 1.49%, and based on new loan amounts was 1.60%, down 0.06 and 0.03 percentage points respectively from the previous month.

All four major banks except Hana Bank now offer mortgage loans with minimum rates in the 2% range. Even Hana Bank, which has a higher base point, has a maximum interest rate of only 4.641%.

The decline in mortgage loan interest rates stimulates borrowers' desire for loans because even borrowing hundreds of millions of won from banks to buy a house does not result in large monthly interest payments.

According to data recently released by the Bank of Korea, the outstanding balance of domestic bank mortgage loans at the end of last year was 653.6 trillion won, an increase of 45.6 trillion won from the previous year. The annual increase is the largest since 2016, when it recorded 55.8 trillion won.

Although the government has introduced various measures to curb real estate, the prospect of rising housing prices and low interest rates appear to have stimulated loan demand.

The government announced the June 19, 2017 real estate measures, followed by the August 2 measures, the September 13, 2018 measures, and the December 16 measures last year, imposing regulations.

This period coincided with a time when mortgage loan interest rates fell along with the Bank of Korea's base rate. Except for one rate hike in November 2018, the Bank of Korea has maintained a low interest rate policy. On the 17th, at this year's first Monetary Policy Committee meeting, the Bank of Korea kept the base rate at 1.25%. This suggests that the low interest rate policy will continue this year as well.

According to the Bank of Korea, total household loans, including mortgage loans and other loans such as credit loans, increased by 60.7 trillion won last year to 888.3 trillion won. The financial sector believes that a significant portion of credit loans was also used to purchase houses.

The prevailing view is that mortgage loan demand will continue as long as the low interest rate policy persists. However, if government policies take effect, speculative demand may decrease somewhat, and the market could be reorganized around actual demanders, but this is still a distant prospect. A financial sector official said, "Maintaining a low interest rate policy and suppressing housing demand are difficult tasks to achieve simultaneously," adding, "Since actual demanders' loan demand will continue for the time being, it is necessary to increase housing supply and send signals that buying a house immediately is not necessary."