[Financial Microscope] Lending Thresholds Lowered in the New Year... Higher Rates, the '6% Barrier'

Household Lending Resumes as Yearly Caps Are Lifted
Banks Signal "Eased Lending Stance in Q1"
Loans Now Accessible, but Interest Rates Climb Again
Benchmark Rates Rise... Top Rates Reach 6%, Adding Pressure

Household lending, which had come to a halt at the end of last year, resumed with the start of the new year. As the annual cap on total household loans was reset at the beginning of the year, banks normalized their lending operations. This has also provided relief to households that had been enduring by withdrawing their savings due to restricted access to loans. This trend is expected to continue at least through the first quarter of this year. However, some point out that as soon as lending resumed, rising market interest rates have once again become a burden for households.

Resumption of Non-Face-to-Face Applications and Lifting of Limits... Banks Signal "Eased Lending Stance in Q1"

Although banks had effectively suspended household lending operations at the end of last year due to the final phase of total loan volume management, there is now a prevailing sentiment among loan officers to lower the lending threshold as the new year begins.

In fact, a lending behavior survey conducted by the Bank of Korea on 18 domestic banks showed that more banks planned to ease their lending stance compared to the previous quarter. The composite lending attitude index recorded '8', turning positive for the first time in four quarters since the second quarter of last year. In particular, the index for household mortgage loans shifted from -44 in the fourth quarter of last year to 6 in the first quarter of this year. A positive index indicates that more financial institutions responded they would ease lending rather than tighten it.

In practice, banks are steadily resuming household lending, which had essentially been halted, with the start of the new year. KB Kookmin Bank resumed refinancing of household loans, including mortgage loans, from other banks as of January 2. Shinhan Bank also restarted sales of mortgage loans, jeonse deposit loans, and mortgage credit insurance (MCI) through loan consultants (brokers). Hana Bank resumed accepting applications for mortgage loans to be executed this year, including those for living stabilization funds. The daily limit management for non-face-to-face mortgage loan applications has also been normalized. Woori Bank lifted the monthly sales cap of 1 billion won per branch on real estate financial products.

Lending Doors Have Just Opened, but Rates Are Rising... Up 0.15 Percentage Points Early in the Year

While loans have become available again, the sharp increase in interest rates at the start of the year is once again burdening households. Mortgage rates, which had remained in the high 3% to low 4% range, are now hard to find, with the highest rates rising to the mid-6% range.

As of January 19, the mixed mortgage rates (based on 5-year bank bonds) at major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) stood at 4.15% to 6.45% per annum. Mortgage rates have been increasing since turning upward in October last year. According to the Korea Federation of Banks, the average mortgage rate at commercial banks fell to 4.058% per annum as of September last year. However, it rose to 4.122% in October, ▲4.226% in November, and ▲4.454% in December. The rate of increase also expanded: ▲0.064 percentage points in October, ▲0.104 percentage points in November, and ▲0.228 percentage points in December.

This is largely due to significant increases in benchmark rates such as bank bonds and the Cost of Funds Index (COFIX). The COFIX, which serves as the standard for variable-rate mortgages, rose by 0.08 percentage points month-on-month to 2.89% for new loans in December last year. COFIX has been on an upward trend for four consecutive months since rebounding in September last year (2.52%).

The rise in the 5-year bank bond, which is used as the basis for fixed-rate mortgages, has been even steeper. According to the Korea Financial Investment Association, the 5-year bank bond (AAA) rate rose from 3.14% on November 4 last year to 3.491% a month later, and further to 3.649% as of January 19. Compared to early January (3.497%), it increased by 0.152 percentage points in just two weeks. A financial industry official stated, "Expectations for a rate cut have disappeared as the Bank of Korea's Monetary Policy Board in January confirmed the end of the rate-cutting cycle."

With Total Loan Volume Regulations Still in Place, Market Rate Volatility Increases..."Limited Impact of Eased Lending"

Although lending thresholds have lowered this year, some point out that the impact of eased lending will be limited for borrowers, as total household loan volume regulations remain in place and market rate volatility is increasing.

Financial authorities plan to continue their strong stance on managing household debt this year. Lee Eogwon, Vice Chairman of the Financial Services Commission, stated, "Given the absolute scale of household debt, we have no choice but to keep the growth rate of total loan volume below the nominal growth rate for a soft landing," reiterating the inevitability of total household loan volume management. In particular, this year, the minimum risk weight for mortgage loans has been raised from 15% to 20%, which will inevitably reduce new mortgage lending. Even if there is some leeway at the beginning of the year, the lending stance throughout the year may actually be tighter than last year. This also explains why it will be difficult for banks to lower the additional interest rates they have raised for household loan volume management.

Meanwhile, market interest rates are expected to remain volatile for the time being. Kim Jinsung, a researcher at Heungkuk Securities, said, "The clear policy shift confirmed by the Bank of Korea's Monetary Policy Board could strengthen the upward trend in interest rates." Gong Dongrak, a researcher at Daishin Securities, said, "Since the possibility of a change in the rate-cutting cycle has already been reflected in the market since November last year, the extent of the increase will be limited," but added, "Volatility may increase for the time being as the market explores a new interest rate range."