Financial Bond Yields Drop Sharply Following Lee Bok-hyun's Remark... Mortgage Loan Rates Fall to 6% Range

[Asia Economy Reporter Minwoo Lee] The mortgage loan interest rate, which had already surpassed 7% and was expected to reach the 8% range within the year, has dropped to the 6% range. This is attributed to banks devising their own measures following a warning from Financial Supervisory Service (FSS) Governor Lee Bok-hyun, as well as a decline in the financial bond rates, which serve as the basis for interest rate calculation.

According to the financial sector on the 5th, as of the previous day, the mortgage loan (mixed type) interest rate range at the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was 4.55?6.26%. This marks a nearly 1 percentage point (p) drop from the upper limit of 4.73?7.21% on the 20th of last month. That day was when FSS Governor Lee Bok-hyun met with heads of commercial banks and stated, "During periods of rising interest rates, the tendency for the interest rate spread between deposits and loans to widen has led to increased criticism over excessive profit-seeking." Following this warning against banks' 'interest profiteering' and his intention to curb the rise in loan interest rates, mortgage loan rates began to be adjusted immediately.

Lee Bok-hyun, Governor of the Financial Supervisory Service, is delivering opening remarks at the "Financial Investment Sector CEO Meeting" held at the Korea Financial Investment Association in Yeongdeungpo-gu, Seoul, on the afternoon of the 28th. Photo by Kang Jin-hyung aymsdream@

Governor Lee’s remarks also appear to have influenced the bond market. The financial bond rates, which serve as the benchmark for mortgage loan interest rate calculation, began to decline from this period. According to the Korea Financial Investment Association, the 5-year financial bond (unsecured, AAA) rate recorded 4.147% on the 17th of last month. This was the highest level in 11 years since October 28, 2011 (4.15%). It had risen approximately 1.8 times from 2.259% at the end of last year. However, after Governor Lee’s remarks, the financial bond rate started to falter. As of the previous day, it fell to 3.799%. It dropped 0.348%p over 11 business days, falling into the 3.7% range within a month.

As banks are successively introducing self-help measures, the upward trend in mortgage loan interest rates is expected to pause for the time being. Shinhan Bank decided to uniformly reduce the mortgage loan ceiling to 5% starting around the 10th of this month. Accordingly, customers with mortgage loan rates above 5% as of the end of last month will have their interest burden frozen at 5% for one year. Woori Bank also lowered the mixed-type interest rate for its mortgage product ‘Woori Apartment Loan’ to 5.18?5.96% as of the previous day. On the 20th of last month, the upper limit exceeded 7.09%, but it dropped 1.13%p in less than a month. NH Nonghyup Bank and K Bank have also recently lowered mortgage and jeonse loan interest rates. Other commercial banks are reportedly considering their own interest rate reduction plans.

With political circles and authorities applying pressure to reduce the deposit-loan interest rate spread, the upward trend in mortgage loan interest rates is expected to pause for the time being. Given that record-high profits are expected daily amid the recent interest rate hikes, banks are unlikely to ignore the situation. The four major financial holding companies?KB Kookmin, Shinhan, Hana, and Woori?already recorded a net profit of 4.6397 trillion KRW in the first quarter of this year. They set a new record by surpassing 4 trillion KRW in quarterly combined net profit for the first time. The 4 trillion KRW net profit is also expected to continue into the second quarter.

A financial sector official said, "Criticism of 'interest profiteering' is a label that sticks to banks regardless of whether their performance is good or bad," adding, "While banks need to share some of the burden of the pain financial consumers endure due to unprecedented inflation and interest rate hikes, direct pressure from authorities in this manner could spark controversy over government-controlled finance."