[Base Interest Rate 1% Era] Soaring Loan Rates Above Rising Savings and Deposits... Approaching 6% Annually (Comprehensive)

Base Interest Rate Raised by Additional 0.25% Points
Bank Deposit and Loan Rates Also Inevitably Rise
Loan Interest Rates Near Annual 6% Threshold, Increasing Interest Burden on Yeongkkeul and Debt Investment Borrowers

[Asia Economy Reporters Sunmi Park and Jinho Kim] As the Bank of Korea raised the base interest rate by an additional 0.25 percentage points on the 25th, it has become inevitable that both deposit and loan interest rates in the banking sector will rise simultaneously. Generally, deposit interest rates tend to increase within a week after a base rate hike, so it is expected that deposit and savings interest rates in the banking sector will rise first around the end of this month, followed by an increase in loan interest rates. Given that banks have already sharply raised loan interest rates to manage the total volume of household loans, borrowers’ interest burdens are expected to increase further.

Deposit and Savings Interest Rates Also Rise... Will Funds Flow into the Market?

According to the financial sector on the 25th, commercial banks are taking the additional base rate hike as an opportunity to further raise interest rates on deposit and savings products and are in the final stages of adjusting the extent of the increase.

The gap between deposit and loan interest rates (deposit-loan rate spread) has widened to an average of 2.1 percentage points, the largest gap since 2010, leading to a consensus internally that interest rates need to be raised more than the base rate hike. A representative from a commercial bank explained, "We recognize consumers’ complaints that loan interest rates are too high while deposit interest rates are low," adding, "There is a strong possibility that the increase in deposit interest rates will be larger than the increase applied during the August base rate hike."

Currently, even after reflecting various preferential rates, the fixed deposit interest rates of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?are around 0.5% to 1.79% per annum. The average is about 1.37% per annum, which shows a significant gap compared to credit loan interest rates ranging from 3.6% to 4.2% per annum.

The financial authorities’ close monitoring of the deposit-loan interest rate spread is also expected to influence the determination of the extent of deposit interest rate hikes in the banking sector. On the 23rd, Jeong Eun-bo, Governor of the Financial Supervisory Service (FSS), stated that while they would not intervene in the interest rate decisions of deposit and loan products by banks, they are closely watching the widening deposit-loan interest rate gap and examining its causes.

The FSS has previously convened deputy heads of commercial banks to review the interest rate calculation system. The FSS issued a consumer alert ‘Caution’ the day before regarding the sale of deposit and savings products offering preferential interest rates, pointing out that banks excessively emphasize the highest interest rates when selling these products, but the actual rates received by consumers fall short.

The End of Zero Interest Rates... Bank Loan Interest Rates to Rise Further

Along with the rise in deposit interest rates, loan interest rates are also expected to increase sharply. It is becoming a foregone conclusion that mortgage loan rates will surpass 6% per annum and credit loan rates will exceed 5% per annum. This is because market interest rates are bound to rise rapidly for the time being due to the Bank of Korea’s push to normalize monetary policy. When the base rate was raised once in August, major loan interest rates surged by more than 1 percentage point.

The average mortgage loan interest rates at the five major commercial banks have already been on an upward trend, rising from 2.76%?3.15% per annum in August to 2.87%?3.37% in September and 3.05%?3.76% in October. The average credit loan interest rates also increased from 2.89%?3.14% in August to 3.15%?3.58% in October. These averages show the trend of rising rates, but the actual increase felt by borrowers is much greater. The upper limits of mortgage and credit loan interest rates at major commercial banks are already in the mid-5% and high-4% ranges, respectively.

Especially since the Bank of Korea has signaled an additional base rate hike early next year, the upward trend in loan interest rates is expected to accelerate further. A financial sector official predicted, "As monetary policy has entered a normalization track, loan interest rates will inevitably continue to rise steadily for the time being."

The problem lies in borrowers’ interest burdens. A borrower who took out a 300 million KRW mortgage loan with a 30-year term at 4% interest in August would pay about 1.43 million KRW monthly, but if the rate approaches 6% within the year, the borrower would have to pay about 1.8 million KRW monthly. This means a difference of 300,000 KRW in monthly interest burden within just 3 to 4 months. The Bank of Korea estimates that in the era of a 1% base interest rate, household interest burdens have increased by 5.8 trillion KRW compared to the end of 2020.