Reasons for the Increase in Mortgage and Personal Loan Interest Rates

Mass Sale of Saemaeul Geumgo Bonds... Bank Bond Yields Rise
Loan Rates Increase as Commercial Banks' Funding Costs Climb
June COFIX Up 0.14 Percentage Points... Variable Mortgage Rates Increase

Since the 18th, mortgage loan interest rates at commercial banks have risen. This was influenced by the increase in deposit and savings interest rates and bank bond yields last month, which caused the COFIX (Cost of Funds Index), the benchmark for variable mortgage loan rates at banks, to rise.

According to the Korea Federation of Banks, the COFIX based on new transactions in June was recorded at 3.70%, up 0.14 percentage points from 3.56% in May. Commercial banks plan to reflect the COFIX rate announced on the 18th in their new variable mortgage loan interest rates starting that day.

COFIX is the weighted average interest rate of funds raised by eight domestic banks. It reflects changes in interest rates of deposit products such as actual deposits, savings, and bank bonds handled by banks. When COFIX falls, it means banks can secure funds by paying less interest, and when COFIX rises, the opposite is true.

Fixed mortgage loan rates and credit loan rates also increased. This was due to a domino effect caused by the Saemaeul Geumgo bank run incident. The upper limit of mortgage and credit loan interest rates surpassed 6% in July. Based on the five major banks (KB Kookmin, Shinhan, Woori, Hana, NH Nonghyup), as of the 17th, variable mortgage loan rates ranged from 4.21% to 6.15%, fixed rates from 3.98% to 5.9%, and credit loan rates (6-month maturity) ranged from 4.42% to 6.29%.

The main reason for the rise in bank loan interest rates was the increase in bank bond yields, which are the source of loan funds. According to the Korea Financial Investment Association, the 5-year bank bond yield, which is the benchmark for fixed mortgage loan rates, rose from 3.96% on May 2 to 4.22% on July 14. The 1-year bank bond yield, which is the benchmark for credit loans and variable mortgage loans, also increased from 3.64% to 3.87% during the same period.

A representative from a commercial bank explained, "The bond market was shaken as Saemaeul Geumgo sold off bonds it held to respond to the bank run incident last week. The flood of supply caused bond prices to fall, which in turn pushed bond yields up, leading to a rise in bank bond yields and consequently affecting bank loan interest rates."

According to the Korea Financial Investment Association, the amount of bonds sold by the mutual savings and credit sector, which includes Saemaeul Geumgo, from July 3 to 14 was 5.0368 trillion won. This is about five times larger than the amount sold in June, which was 1.0656 trillion won.

As bank bond yields surged, banks feeling the pressure chose to slightly raise deposit and savings interest rates to secure funding. For example, KB Star fixed deposits increased from 3.70% in early June to 3.71% currently, and NH Nonghyup All One e-Deposit rose from 3.80% to 3.90% during the same period.

Another commercial bank official said, "Mortgage loan rates hit a low point around 3% in May this year. Afterward, as financial authorities announced stricter liquidity regulations starting in July, banks increased bank bond issuance, causing rates to rise. The Saemaeul Geumgo incident then added fuel to the fire, accelerating the rise in loan interest rates."