Interest Rates to Drop Soon... Balloon Effect Causes Loan Rates to Rise Instead [1mm Geumyung Talk]

Major commercial and regional banks are responding to soaring household debt by raising loan interest rates. This is because maintaining relatively low interest rates could lead to a so-called 'balloon effect,' where loan demand becomes concentrated. While the Bank of Korea is expected to soon cut its benchmark interest rate following the U.S. Federal Reserve (Fed), loan interest rates are nonetheless rising.

[Image source=Yonhap News]

According to the financial sector on the 2nd, Woori Bank will raise mortgage and jeonse (long-term rental deposit) loan interest rates by up to 0.20 percentage points starting today. For mortgage loans, both 5-year fixed (hybrid) and variable rates will increase by 0.20 percentage points, and jeonse loans will also see a 0.20 percentage point increase through either a reduction in preferential rates or adjustments to the interest rates.

Woori Bank is not the only one raising loan interest rates. On the 4th, Shinhan Bank and KB Kookmin Bank will also consecutively increase their loan interest rates. Shinhan Bank will abolish the long-term preferential rate of 0.10 percentage points for mortgage loans intended for new purchases over 5 years, and will raise the 6-month new balance product by 0.20 percentage points. Jeonse loan rates will increase by up to 0.45 percentage points depending on the guarantee institution. KB Kookmin Bank will also raise mortgage and jeonse loan interest rates by up to 0.20 percentage points.

The competitive increase in loan interest rates by commercial banks is interpreted as an effort to prevent the balloon effect. As authorities and banks tighten maturity and limits to stabilize household debt, maintaining relatively low interest rates could cause loan demand to concentrate, leading to side effects.

Regional banks, which have already suffered from the balloon effect, are also joining the interest rate hike trend. iM Bank, recently promoted to a commercial bank, raised loan interest rates twice last month?by 0.50 to 0.60 percentage points on the 4th and by 0.65 percentage points on the 13th. This is because as major commercial banks respond to the surge in household debt with interest rate hikes, an inversion phenomenon occurs where other banks’ rates become cheaper, causing loan demand to concentrate.

Regional banks such as BNK Gyeongnam Bank have also stopped handling non-face-to-face mortgage loans in the metropolitan area and raised loan interest rates by 0.35 percentage points to block the concentration phenomenon. A banking industry official said, "Unlike in the past, regional banks now operate non-face-to-face loan products similarly to other banks, so the barriers are not high," adding, "This appears to be a measure to prevent the balloon effect."

The key issue is the direction of the benchmark interest rate. Although a cut in the benchmark rate may not have an immediate significant impact on housing prices, it can act as a catalyst to boost investment sentiment. A financial sector official said, "Even if the Bank of Korea lowers the benchmark interest rate, the pace may not be as fast as expected, and market interest rates have already largely priced in the possibility of a rate cut. However, since a rate cut could stimulate investment sentiment, it needs to be closely monitored."

Accordingly, the banking sector expects that tightening of household loans will continue for the time being. On the 30th of last month, Kim Byung-hwan, Chairman of the Financial Services Commission, held a meeting with CEOs of financial holding companies and urged, "Please pay special attention to achieving the household loan targets for the remaining three months of this year," and added, "Next year as well, please establish household debt management goals with a sense of responsibility at the financial holding company level to ensure the downward stabilization of the household debt-to-GDP ratio continues."