[Heated Deposit Competition]② In-Bank Loan Interest Rates Also in the 4% Range... Rising Deposit Rates Backfire

[Image source=Yonhap News]

The increase in deposit interest rates in the financial sector is coming back like a boomerang. As funding costs rise, mortgage loan interest rates at banks continue to climb, approaching the 7% level seen at the beginning of the year. Even the interest rates of internet-only banks, which once rivaled policy mortgage products, are struggling to maintain a lower bound of 3% for mixed (fixed) rates.

According to the financial sector on the 21st, as of the previous day, the variable mortgage loan interest rates (new COFIX, 6 months) of the four major domestic commercial banks (KB Kookmin, Shinhan, Hana, Woori) rose to between 4.35% and 6.94%. This is similar to the level at the end of January, when the base interest rate peaked and began to decline (4.87% to 6.96%).

Bank mortgage loan interest rates surged past 8% at the upper end in mid-January last year due to rapid base rate hikes by the U.S. Federal Reserve (Fed) and the Bank of Korea, the Legoland incident, and the resulting bond market tightening. However, they quickly declined afterward due to market rate stabilization efforts and regulatory pressure. The Bank of Korea's consecutive base rate freezes also had an impact.

Since then, however, loan interest rates have been on the rise again since May. The COFIX (Cost of Funds Index), which serves as the benchmark for variable mortgage loan rates at banks, was 3.44%?below the base rate of 3.50%?until April, but rose by 0.12 percentage points to 3.56% in May and by another 0.14 percentage points to 3.70% in June. COFIX is the weighted average interest rate of funds raised by eight domestic banks, reflecting changes in interest rates of deposit products such as actual savings, time deposits, and bank bonds handled by banks.

The rising COFIX indicates that banks' funding costs are increasing. For example, the 5-year bank bond rate, which is the basis for mixed mortgage loans, was in the 3.8% range in May but has since risen repeatedly, recently reaching around 4.1% to 4.2%. In early June, during the Saemaeul Geumgo bank run (massive deposit withdrawals), it even rose to 4.403% (on the 10th).

The higher bank bond rates have led banks to turn their attention to deposit products such as savings and time deposits, which is also coming back as a boomerang. The representative 1-year fixed deposit interest rates at the four major banks rose by about 0.20 percentage points from the previous month to between 3.71% and 3.90%. Recently, some small and medium-sized banks have introduced deposit products with rates in the 4% range, and some large banks have also started offering 4% range rates under conditions such as preferential rates for first-time transactions.

As a result, the interest rate competitiveness of internet-only banks, which once threatened policy mortgage products like the Special Bogeumjari Loan with mortgage rates in the 3% range, is no longer what it used to be. As of the previous day, KakaoBank's variable mortgage loan rates ranged from 4.06% to 6.82%, and K Bank's from 4.21% to 6.03%, with the lower bound exceeding 4%. The 3% range is barely maintained only in mixed mortgage loans (KakaoBank 3.81% to 6.44%, K Bank 3.99% to 5.03%).

The financial sector expects loan interest rates to continue rising for the time being. Along with the boomerang effect of rising deposit rates, the Fed has hinted at two additional rate hikes. A representative from a commercial bank said, "As deposit interest rates are gradually rising, COFIX is expected to continue increasing for the time being," adding, "The Fed's indication of possible additional rate hikes is also expected to affect funding costs."