Why Did My Loan Rate Go Up Even Though the Benchmark Rate Was Cut? [Why&Next]

Bank of Korea Cuts Benchmark Rate, but Bank Lending Rates Rise
Banks Respond to Increased Household Loan Demand Driven by Expectations of Rising Housing Prices by Raising Lending Rates
Market Rates Also Rise Due to New Government's Expansionary Fiscal Policy

Although the Bank of Korea has lowered its benchmark interest rate, banks have instead raised lending rates, increasing the interest burden on borrowers. It is analyzed that banks raised lending rates in order to curb the rapidly increasing demand for household loans, which has been fueled by the prevailing atmosphere of rising housing prices. In addition, the rise in market interest rates, which serve as the basis for bank lending rates, appears to have been influenced by the expansionary fiscal policy of the new government.

Bank of Korea cuts benchmark rate, but bank lending rates rise

According to the financial sector on June 13, major domestic banks have successively raised their mortgage loan rates since the beginning of this month. KB Kookmin Bank raised the rates on its main non-face-to-face mortgage loan products by more than 0.2 percentage points compared to the previous month, and Woori Bank also increased its mortgage loan rates by about 0.15 percentage points. K Bank raised its apartment mortgage loan spread by 0.29 percentage points on June 2, and SC First Bank plans to raise its mortgage loan rates starting June 18. Other major banks have also shown a slight upward trend in variable mortgage loan rates compared to last month.

Despite the Bank of Korea lowering its benchmark rate by 0.25 percentage points on May 29, commercial banks have raised lending rates because the market interest rates, which serve as the basis for rate calculations, have risen. In addition, as housing prices have increased, especially in Seoul, demand for household loans has surged, prompting banks to implement stricter loan management policies.

According to the Financial Services Commission and the Financial Supervisory Service, household loans from banks and other financial institutions increased by about 6 trillion won last month compared to the previous month. This is the largest increase in eight months since September last year. The rise is attributed to an increase in housing transactions following the lifting of land transaction permit zones at the beginning of the year, as well as preemptive loan demand ahead of the stricter Debt Service Ratio (DSR) regulations set to take effect in July. In particular, the recent clear upward trend in housing prices in Seoul has led to such a surge in demand that some borrowers are rushing to secure loans as soon as they become available.

The financial authorities have instructed banks to strengthen their own management, concerned that excessive funds may be flowing into the real estate market due to speculative demand, resulting in excessive lending. Kwon Daeyoung, Secretary General of the Financial Services Commission, emphasized at a household debt review meeting on June 11, "Given the current factors driving the growth of household debt, such as the recent trend of interest rate cuts and a buoyant housing market, it is more important than ever to maintain a heightened sense of vigilance and consistent risk management." As the authorities continue to call for stricter self-management of household loans by banks, it is analyzed that banks are continuing to raise lending rates. However, there is criticism that banks are engaging in interest margin practices by lowering deposit and savings rates while raising lending rates during this process.

Market rates rise due to new government's expansionary fiscal policy

The rise in market interest rates also serves as grounds for the increase in bank lending rates. Bank lending rates are calculated by adding a spread to market rates such as bank bonds and the Cost of Funds Index (COFIX). Bank bond rates are usually influenced by government bond yields, and recently, as government bond yields have risen, bank bond rates have also shown a clear upward trend.

The yield on three-year government bonds was around 2.25% at the beginning of last month, but as of June 12, it had risen to 2.43%. As the Lee Jaemyung administration pursues expansionary fiscal policy, including the formulation of a second supplementary budget, the possibility of large-scale government bond issuance has increased, leading to a clear upward trend in government bond yields. Kim Kimyung, a researcher at Korea Investment & Securities, explained, "Since the launch of the new government, expectations of expansionary fiscal policy have created upward pressure on long-term government bond yields. As the second supplementary budget expands to over 35 trillion won, concerns about deficit-financed government bond issuance have pushed the three-year government bond yield up to the 2.4% range."

There are forecasts that the upward trend in market interest rates may continue for some time. This is because the Bank of Korea's ability to lower the benchmark rate is limited, and the government's economic stimulus measures may continue through the second half of the year.

Global investment banks also expect Korea's government bond yields to continue rising. Nomura Securities predicted, "The government's expansionary fiscal policy and less accommodative monetary policy will increase upward pressure on government bond yields." Bloomberg assessed, "Concerns about increased government debt due to the new government's expanded fiscal spending are adding pressure to the bond market."